Fontana Company enters into a lease agreement on January 1, 2016, for equipment leased by Mindbender Insurance Company. The following data are relevant to the lease agreement:
• The term of the non- cancellable lease is four years with no renewal or purchase options. Payments of $ 129,056 are due at the beginning of each year.
• The fair value of the equipment on January 1, 2016, and the cost to Mindbender, is $ 449,999. he equipment has an economic life of four years with no salvage value.
• Fontana depreciates similar machinery it owns using the straight-line method.
• The lessee pays all executory costs amounting to $ 8,000 per year on December 31 of each year.
• Fontana’s incremental borrowing rate and the implicit rate in the lease are both 10% per year. The lessee knows the implicit rate used in the lease computations.
• Mindbender has no uncertainties as to future costs and collection from Fontana.
Required
a. Indicate the type of lease Fontana Company has entered into and what accounting treatment is applicable.
b. Prepare an amortization schedule for the entire lease term. All payments are made on January 1.
c. Prepare the journal entries on Fontana’s books that relate to the lease agreement for the first year of the lease term.
d. Prepare the journal entries on Mindbender Insurance Company’s books that relate to the lease agreement for the first year of the lease term.