Grady Leasing Company signs an agreement on January 1, 2012, to lease equipment to Azure Company. The following information relates to this agreement.

  1. The term of the noncancelable lease is 5 years with no renewal option. The equipment has an estimated economic life of 5 years.
  2. The fair value of the asset at January 1, 2012, is $90,000.
  3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $7,000, none of which is guaranteed.
  4. Azure Company assumes direct responsibility for all executory costs, which include the following annual amounts: (1) $900 to Frontier Insurance Company for insurance and (2) $1,600 to Crawford County for property taxes.
  5. The agreement requires equal annual rental payments of $20,541.11 to the lessor, beginning on January 1, 2012.
  6. The lessee’s incremental borrowing rate is 12%. The lessor’s implicit rate is 10% and is known to the lessee.
  7. Azure Company uses the straight-line depreciation method for all equipment.
  8. Azure uses reversing entries when appropriate.

Instructions
(Round all numbers to the nearest cent.)
  (a) Prepare an amortization schedule that would be suitable for the lessee for the lease term.
  (b) Prepare all of the journal entries for the lessee for 2012 and 2013 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting period ends on December 31.