On the first day of its accounting year, January 1, 2020, Lessee Inc. leased a building at an annual payment of \(\$ 138,847.84\) to be paid at the beginning of each year for 10 years. The first payment was paid immediately. The building, which is new, cost \(\$ 1,100,000\) and has an estimated useful life of 12 years. The lessor's implicit rate is \(6 \%\) and is known to Lessee Inc. The residual value of the building of \(\$ 30,000\) was guaranteed by Lessee Inc. who expects the residual value to approximate \(\$ 20,000\). Lessee Inc. incurred the following additional costs and received the following incentives pertaining to this lease on January 1, 2020:

- Paid legal fees of \(\$ 1,000\) related to the execution of the lease.

- Paid a fixed lease payment of \(\$ 138,847.84\) plus a \(\$ 3,500\) recurring payment to the lessor for hazard insurance on the building.

- Received a lease incentive of \(\$ 1,500\) to sign the lease.

Required

a. How would Lessee Inc. classify the lease?

b. Prepare an amortization schedule of the lease liability.

c. Compute the value of the right-of-use asset.

d. Prepare the entries for Lessee Inc. for years 2020 and 2021. Assume legal fees were paid and the lease incentive was received in 2019.

e. What would be the value of the lease liability if the lessor charged a market price for hazard insurance, which changed from year to year?