Leases Eubank Company, as lessee, enters into a lease agreement with WS bank (the lessor) on Jan 1, 2011, for equipment. The following data are relevant to the lease agreement: The term of the noncancelable lease is 4 years. Payments of $978,446 are due on Jan 1 of each year. Eubank Company plans to return the equipment to WS Inc. at the end of the lease term on Dec 31, 2014. The fair value of the equipment on Jan 1, 2011 is $3,500,000. The equipment has an economic life of 6 years with no salvage value.

Eubank depreciates similar machinery it owns on straight-line basis. Eubanks 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 (present value factor for 4 periods at 8%, 3.57710; at 10%, 3.48685). Required: a) Indicate whether the lease WS bank has entered into is an operating lease or a financing lease and what accounting treatment is applicable. b) Indicate the type of lease to WS and what accounting treatment is applicable. c) Prepare the journal entries on both Eubanks and WSs books that relate to the lease agreement for the following dates: (Round all amounts to the nearest dollar. Include a partial amortization schedule.) 1) Jan 1, 2011. 2) December 31, 2011. 3) Jan 1, 2012. 4) December 31, 2012.