Determining Lease Type and Recording Journal EntriesLessee and Lessor

Rentals Inc. leases a vehicle to United Inc. for four years on January 1 of Year 1, requiring equal annual payments on each January 1, with the rst payment due at the lease commencement. The underlying asset, recently purchased new, cost the lessor $49,500. The estimated unguaranteed value of the asset at the end of the lease term is $5,500. The annual lease payments were computed to yield Rentals Inc. 6%, a rate known to United Inc. The underlying asset has a six-year life with zero residual value at the end of Year 6. There is no purchase option, and the asset is retained by Rentals Inc. at the end of the lease term. The accounting period for both lessor and lessee ends December 31.

Required

a. Compute the annual lease payment calculated by the lessor.

b. What type of lease is this to the lessor and lessee?

c. Prepare a lease liability schedule and right-of-use asset schedule for the lessee for the rst two years of the lease term.

d. Provide journal entries for the lessee on January 1 and December 31 of Year 1 and Year 2.