On December 31, 2014 Company X entered a lease agreement for the rental of machinery under the following terms:
a) The lease is for 5 years and is non-cancelable
b) Payments are due at the beginning of the period and are paid annually
c) There is an option to extend the lease for 2 more years and it is reasonable certain that X will re-new the lease after 5 years
d) The lease payments are $7,000 per year
e) The estimated useful life of the machinery is 9 years
f) There are no bargain purchase options at the end of the lease term
g)The implicit rate on the lease is 4 percent and the incremental borrowing rate to X is 5 percent
h) The fair market value of the equipment on the inception date is $50,000
Using the present lease rules-ASU 840, please answer the following: keep in mind that X will prefer to treat this lease as an off balance sheet transaction.
1) What type of lease is this to X? why?
2) Record the journal entry on December 31,2014
3) give a Balance Sheet to reflect this lease transaction as of January 1, 2017
4) give the income statement effects of this lease for the 2016 calendar year
5) give the cash flow effects of this lease for the 2018 calendar year
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