ABC Incorporated leases a piece of equipment to Cupid Corporation on January 1, 2018. The lease agreement called for annual rental payments of $4,892 due on December 31 of each year, with the first payment beginning on January 1, 2018. The equipment has an economic useful life of 6 years,a fair value of $25,000, a cost of$20,000, and both parties expect a residual valueof $8,250 at the end of the lease term, though this amount is not guaranteed. Cupid s incremental borrowing rate is5%, and the lessor's implicit rate is unknown. There is no bargain purchase option,ownership of the lease does not transfer at the end of the lease term, and the leased asset is not of a specialized nature.

Instructions:

A.Discuss the nature of this lease to the lessee, using the 5 lease tests.

B.Calculate the Present Value of the Minimum Lease Payments.

C.Prepare a lease amortization schedule for Cupid Corporation for the4-year lease term.

D.Calculate the annual amortization expense.

E.Prepare the journal entries on the lessee's books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2018, 2019 and 2020.Note:The lessee's accounting periods end on December 31.