3.(15 points) On January 1, 2020, Cleburn Inc. enters into a 5-year equipment lease agreement for $57,000 annual payments (first payment due immediately). The lease grants the lessee an option to renew the lease for an additional 3 years. Lease payments adjust to current market rates for equivalent rentals at the time of renewal. Cleburn Inc. is reasonably certain that it will exercise the renewal option due to the customization of the equipment. The estimated useful life of the equipment is 10 years. The lessee is not aware of the implicit rate of the lease, but the lessees incremental borrowing rate is 6%.

Time value of money factors at 6% 4 years 5 years 6 years 7 years 8 years

Future Value of 1 1.26248 1.33823 1.41852 1.50363 1.59385

Present Value of 1 0.79209 0.74726 0.70496 0.66506 0.62741

Present Value of Ordinary Annuity of 1 3.46511 4.21236 4.91732 5.58238 6.20979

Present Value of Annuity Due of 1 3.67301 4.46511 5.21236 5.91732 6.58238

Required a. How would Cleburn Inc. classify the equipment lease?

b. Prepare an amortization schedule of the lease liability. Round each amount in the schedule to the nearest whole dollar. Use the rounded amount for later calculations in the schedule. Include any net rounding difference to Lease Liability in the Interest on Liability amount for Jan. 1, 2027.

Date Lease Payment Interest on Liability Reduction of Lease Liability Lease Liability

Jan. 1, 2020 _____________ _______________ ____________________ ____________

Jan. 1, 2021 _____________ _______________ ____________________ ____________

Jan. 1, 2023 _____________ _______________ ____________________ ____________

Jan. 1, 2024 _____________ _______________ ____________________ ____________

Jan. 1, 2025 _____________ _______________ ____________________ ____________

Jan. 1, 2026 _____________ ________________ ____________________ ____________

Jan. 1, 2027 ______________ ________________ ____________________ _____________

Total ______________ ________________ ____________________ _____________