3. Use the following information to answer the questions below.

• The equipment of lease has 5-year service life with no salvage value.
• The lease term is 5 years, requiring equal payment of $11,990.81 at the beginning of year.
• The annual $11,990.81 rental payment includes $1,000 insurance and property taxes per year.
• The lessee depreciates similar equipment on a straight-line basis.
• The discount rate is 10%.

1. Determine whether the lease is capital lease or operating lease, and why.

2. Using the appropriate factor, calculate the present value of lease payments.

FVF_{5, 10%} = 1.61051

PVF_{5, 10%} = .62092

FVF-OA_{5, 10%} = 6.10510

PVF-OA_{5, 10%} = 3.79079

PVF-AD_{5, 10%} = 4.16986

3. Complete the following lease amortization schedule.

Year. Lease Payment. Executory Costs. Interest (10%). Lease-liability reduction. carrying lease liability.

1

2

3

4

5

4. Prepare the journal entries at the beginning of lease.

5. Prepare the journal entries at the end of Year 1 (=at the beginning of Year 2).