Question One: (15 marks) (B1, C2) Ahlia Company, as lessee, enters into a lease agreement on July 1, 2017, for equipment

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Question One: (15 marks) (B1, C2)
Ahlia Company, as lessee, enters into a lease agreement on July
1, 2017, for equipment. The following data are relevant to the
lease agreement:
1. The term of the
noncancelable lease is 5 years, with no renewal option. Payments of
$500,000 are due on June 30 of each year.
2. The fair value of the
equipment on July 1, 2017, is $1,699,635. The equipment has an
economic life of 8 years with no salvage value.
3. Ahlia depreciates
similar machinery it owns on the straight-line method.
4. The lessee pays all
executory costs.
5. Ahlia’s incremental
borrowing rate is 10% per year. The lessee is aware that the lessor
used an implicit rate of 8% in computing the lease payments
(present value factor for 5 periods at 8%, 3.399270; at 10%,
3.79079.)
Instructions
(a) Indicate the
type of lease Ahlia Company has entered into and what accounting
treatment is applicable. (3 marks)
(b) Prepare the
journal entries on Ahlia's books that relate to the lease agreement
for the following dates: (Round all amounts to the nearest dollar.
Include a partial amortization schedule.)
(12 marks)