P Company enters into a lease agreement with L Co on Jan to lease a machine to be used
in its manufacturing operations. The following data pertain to this agreement.
a The term of the noncancelable lease is years, with no residual value at the end of the lease term.
Payments of $ are due on Jan. of each year. The first payment in advance is paid on
Jan.
b The fair value of the machine on Jan is $ The machine has an economic life of years,
with salvage value of $ none of which is guaranteed. The machine reverts to the lessor upon the
termination of the lease.
c P pays executory costs of $ to Rock Insurance Co and $ to County for property taxes.
d Ps incremental borrowing rate is and the lessor's is and is known to lessee.
Is this a capital lease or operating lease. Why?
Instructions: Prepare journal entries on the books of the lessee through the first two years of lease.
The accounting period of and Company ends on December
