corporation as lessee, enters into a lease agreement on July 1, 2012, for equipment. The following data are relevant to the lease agreement:

i. The term of this non-cancelable lease is 4 years, with no renewal option. Payments of

$234,827 are due at the July 1, 2012 signing and each July 1^stduring the term of the

lease agreement.

ii. The fair value of the equipment on July 1, 2012 is $840,000. The equipment has an

economic life of 6 years with no salvage value.

iii. corporation depreciates similar machinery it owns on the straight-line basis, for theportionof the year depreciable, on their books.

iv. The lessee pays all executory costs.

v. corporation's incremental borrowing rate is 10% per year. The lessee is aware that the

lessor used an implicit rate of 8% in computing the lease payments. The present value

factor for an annuity due of 4 periods at 8% is 3.5771; at 10% it is 3.48685.

INSTRUCTIONS

Indicate the type of lease corporation has entered into operating or capital and why it is that type.

Briefly describe how this treatment is better or not for a potential investor, when they read corporation's financial statements.

Provide a partial amortization schedule, sufficient to support journal entries through December 31, 2013

Prepare the journal entries on corporation's books that relate to the lease agreement for the following 4 dates: (Round all amounts to the nearest dollar)

1. July 1, 2012.

2. December 31, 2012

3. July 1, 2013.

4. December 31, 2013.