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Glaus Leasing Company agrees to lease machinery to Jensen Corporation on January $1,2015.$ The

following information relates to the lease agreement.

$1.$ The term of the lease is $7$ years with no renewal option, and the machinery has an estimated

economic life of $9$ years.

$2.$ The cost of the machinery is $525,000,$ and the fair value of the asset on January $1,2015,$

is $700,000$

$3.$ At the end of the lease term, the asset reverts to the lessor. At the end of the lease term, the

asset has a guaranteed residual value of $100,000.$ Jensen depreciates all of its equipment

on a straight$-$line basis.

$4.$ The lease agreement requires equal annual rental payments, beginning on January $1,2015.$

$5.$ Glaus desires a $10\%$ rate of return on its investments. Jensen's incremental borrowing rate

is $11\%,$ and it is impracticable to determine the lessor's implicit rate.

Required

$($a$)$ Calculate the amount of the annual rental payment required. $(2$ Marks$)$

$($b$)$ Compute the Present value of the minimum lease payments. $(2$ Marks$)$

$($c$)$ Prepare the journal entries Jensen would make in $2015$ and $2016$ related to the lease

arrangement. $(3$ Marks$)$

$($d$)$ Prepare the journal entries Glaus would make in $2015$ and $2016.(3$ Marks$)$

$($Assume the accounting period ends on December $31.)$

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