On July 1, 20X1, Burgundy Studios leases camera equipment from Corningstone Corporation. Corningstone had to make significant changes to the equipment to meet Burgundy’s needs, and it would be significantly costly to modify the equipment for alternative lessees. The lease covers eight years and requires lease payments of $42,423, beginning on June 30, 20X2. The unguaranteed residual value is $30,000. On July 1, 20X1, the equipment has an approximate fair value of $260,000 and an estimated useful life of 10 years. The implicit rate in the lease is 8%. Burgundy’s fiscal year ends on December 31, and the company depreciates its other equipment on a straight-line basis.

Required:

1. Explain why this is a finance lease for Burgundy Studios.

2. Prepare an amortization table for the lease.

3. Prepare Burgundy’s journal entries from the commencement of the lease through June 30, 20X3. Be sure to make any necessary reclassifications to current liabilities at the end of each reporting period.

4. Compute and label the lease amounts to be shown on the balance sheet and income statement for the years ended December 31, 20X1, and December 31, 20X2.

5. Show how the income statement and balance sheet amounts would differ for 20X1 and 20X2 if the lease were treated as an operating lease.