1.Lessee enters into a four-year lease of equipment and concludes that the agreement is a finance lease because the lease contains an option for Lessee to purchase the equipment at the end of the lease and the Lessee is reasonably certain to exercise that option. The arrangement provides the following:

Lease term

Four years, with the first payment due at lease commencement and the remainder annually at the lease anniversary date thereafter

Annual payments, beginning at lease commencement and annually thereafter

Commencement - $50,000

Year 2 - $53,000

Year 3 - $55,000

Year 4 -- $60,000

Discount rate

4.5%

PV of lease payments

$204,577

Complete the following schedule to show the impact on the income statement and balance sheet.

Initial

Year 1

Year 2

Year 3

Year 4

Cash lease payments

Income statement:

Lease expense recognized:

Interest expense

Amortization expense

Total periodic expense

Balance sheet:

ROU asset

Lease liability

Prepare the journal entries at the time of the lease commencement and for Year 1 of the lease term.