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Problem 8 Lease - Guaranteed Salvage Value On January 1,1999 M...

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Accounting

Problem 8
Lease - Guaranteed Salvage Value
On January 1,1999 M Company signs a 6-year noncancelable lease agreement to lease a machine to B
Company. The following data pertain to this agreement.
3 Payments of $81,365 are due on Dec. 31 of each year. First payment in advance is paid on Jan. 1,1999.
b. The fair value and the cost of the machine to C Company on Jan 1,1999 is $425,000.
c.M and B company use the straight-line method to depreciate equipment.
d. B's implicit rate is 12% and the salvage value is $50,000 and is guaranteed by lessee.
Instructions
Is this a capital lease or operating lease? Show results for each of 4 capitalization tests.
Instructions: Prepare journal entries on the books of the lessee through 1999 and 2000.
The accounting period of B ends on December 31.
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