1. Caterpillar Financial Services Corp. (a subsidiary of Caterpillar) and Sterling Construction Corp. sign a lease agreement dated January 1, 2017, that calls for Caterpillar to lease a frontend loader to Sterling beginning January 1, 2017. The terms and provisions of the lease agreement, and other pertinent data, are as follows.

The term of the lease is five years. The lease agreement is noncancelable, requiring equal rental payments of $25,981.62 at the beginning of each year (annuity-due basis).

The loader has a fair value at the inception of the lease of $100,000, an estimated economic life of five years, and no residual value.

The lease contains no renewal options. The loader reverts to Caterpillar at the termination of the lease.

Sterlings incremental borrowing rate is 11 percent per year.

Sterling depreciates, on a straight-line basis, similar equipment that it owns.

Caterpillar sets the annual rental to earn a rate of return on its investment of 10 percent per year; Sterling knows this fact.

Required:

1. What kind of lease is this to Sterling Construction Corp.?

2. Compute the present value of the minimum lease payments.

3. Prepare journal entry to record capital lease on Sterling Construction Corps books on January 1, 2017.

4. Prepare journal entry to record the first lease payment on January 1, 2017.

5. Prepare a lease amortization schedule for Sterling Construction Corp.

6. Prepare journal entry to record accrued interest at Dec 31, 2017

7. Prepare journal entry to record the depreciation on Dec 31, 2017

8. Prepare journal entry to record the lease payment of January 1, 2018