Demir Leasing Company signs an agreement on January 1, 2015, to lease equipment to Azure Company. The following information relates to this agreement:

1. The term of the lease is 5 years. The equipment has an estimated economic life of 5 years.

2. The fair value of the asset at January 1, 2015, is 90,000.

3. The present value of the minimum lease payments is 85,653.55.

4. The agreement requires equal annual rental payments of 20,541.11 to the lessor, beginning on January 1, 2015.

5. Azure Company assumes direct responsibility for all executory costs, which include the following annual amounts: (1) 900 to Frontier Insurance Company for insurance and (2) 1,600 for property taxes. These executory costs are not included in the annual rental payments; paid separately from the annual rental payments.

6. The lessees incremental borrowing rate is 12%. The lessors implicit rate is 10% and is known to the lessee.

7. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of zero.

8. Azure Company uses the straight-line depreciation method for all equipment.

Instructions (Round all numbers to two decimal places.)

(a) Justify if this lease is a finance or operating lease.

(b) Prepare an amortization schedule that would be suitable for the lessee for the lease term.

(c) Prepare all of the journal entries for the lessee for 2015 and 2016 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessees annual accounting period ends on December 31.