On December 31, 20X0, the law firm of Preston, Gomez, and Bergman is offered 30 laptop computers for the firm’s partners. It can either (a) buy them outright for $100,000 cash, or (b) lease them on a noncancelable lease whereby rental payments would be made at the end of each year for 3 years. The computers will become obsolete and worthless at the end of 3 years. The company can borrow $100,000 cash on a 3-year loan payable at maturity at 8% compounded annually.

1. Compute the annual rental payment, assuming that the lessor desires an 8% rate of return per year.

2. Suppose the lease could be accounted for as an operating lease. What annual journal entry would the company make?

3. The lease is a capital lease. Prepare an analytical schedule of each lease payment. Show the lease liability at the beginning of the year, and interest expense, lease payment, and lease liability at the end of the year. You need not differentiate between current and noncurrent liabilities in this analysis.

4. Prepare an analysis of transactions for the capital lease, using the balance sheet equation format.

5. Prepare yearly journal entries for the capital lease. Omit explanations.