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At the beginning of year 1, Lessee enters into a three-year lease of retail space and concludes that the agreement is an operating lease Lessee

  • At the beginning of year 1, Lessee enters into a three-year lease of retail space and concludes that the agreement is an operating lease
  • Lessee agrees to pay the following annual payments at the end of each year: $10,000 year 1, $12,000 in year 2 and $14,000 in year 3
  • Lessee makes a payment of $5,000 to an existing tenant to obtain the lease and concludes that the payment qualifies as an initial direct cost
  • There are no purchase options, payments to the lessor before the lease commencement date, variable payments based on an index or rate or lease incentives from the lessor
  • At lease commencement, Lessee determines that the present value of the lease payments is $33,000. Lessee uses it's incremental borrowing rate of 4.235% because the rate implicit in the lease cannot be readily determined.

From the lessee perspective, what are the annual cash flows and income statement activity and end of each year balance sheet amounts related to this lease.

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