Videos-to-Go signed a lease for a vehicle that had an expected economic life of eight years and a fair value of \(\$ 18,000\). The lessor is the leasing subsidiary of a national car manufacturer. The terms of the lease are as follows:

- The lease term begins on 1 January 20X2, and runs for five years.

- The lease requires payments of \(\$ 5,800\) each 1 January, including \(\$ 1,700\) for maintenance and insurance costs.

- At the end of the lease term, the lease is renewable for three one-year periods, for \(\$ 2,600\) per year, including \(\$ 2,100\) for maintenance and insurance. The normal rental costs for a similar used vehicle would be approximately double this amount.

- At the end of any lease term, if Videos-to-Go does not renew the contract, the vehicle reverts back to the lessor. The lessor may choose to leave the vehicle with Videos-to-Go if its value is low.

Videos-to-Go does not know the interest rate implicit in the lease from the lessor's perspective but has an incremental borrowing rate of \(12 \%\). Videos-to-Go has a 31 December year-end and uses straight-line depreciation for all assets.

Required:

1. Explain why this is a finance lease for the lessee.

2. Prepare a lease amortization schedule.

3. Prepare journal entries for \(20 X 2\) and \(20 X 3\).

4. Show how the lease would be reflected on the SFP, income statement, and CFS for 20X2 and 20X3. Segregate debt between its current and non-current components. Assume the indirect method for operating activities in the statement of cash flows.

5. How much interest expense would be reported on the income statement in each year from 20X2 to 20X10 if Videos-to-Go had a 31 May fiscal year-end?