On 17 August 20X1, Renfrew Corporation negotiated a lease agreement with National Leasing Company (NLC) for computer equipment. The equipment has an expected economic life of 7 years and a fair market value of \(\$ 36,000\). The lease term is for 5 years, beginning on 1 October 20X1. Lease payments are \(\$ 7,500\) per year, payable at the beginning of each lease year. At the end of the lease term, Renfrew can negotiate a buyout price with NLC. If no buyout is negotiated, the equipment reverts to NCL.

Renfrew has an incremental borrowing rate of \(8 \%\) and does not know NLC's interest rate implicit in the lease. Renfrew uses straight-line depreciation calculated on a monthly basis. Renfrew prepares financial statements only at the company's fiscal year-end of 31 December.

Required:

1. Is this a finance lease or an operating lease for Renfrew? Explain.

2. Prepare an amortization table.

3. Prepare Renfrew's journal entries for 20X1 and 20X2.

4. What is the balance of the lease liability account on 31 December 20X2? Reconcile this balance with your amortization schedule.

5. Renfrew uses current-non-current classification. How much of the year-end \(20 \times 2\) lease liability will be shown as a current liability and how much as a long-term liability?