Lessee enters into a four-year lease of equipment and concludes that the agreement is a finance lease because the lease contains an option for Lessee to purchase the equipment at the end of the lease. The Lessee is reasonably certain to exercise that option. The arrangement provides the following:

The lease term is Four years, with the first payment due at lease commencement and the remainder annually at the lease anniversary date after that

Annual payments, beginning at lease commencement and annually after that

Commencement $50,000

Year 2 $53,000

Year 3 $56,000

Year 4 -- $60,000

Discount rate 4.5%

PV of lease payments $204,577

Complete the following schedule to show the impact on the income statement and balance sheet.

Complete the following schedule to show the impact on the income statement and balance sheet.

Initial Year 1 Year 2 Year 3 Year 4

Cash lease payments Income statement:

Lease expense recognized:

Interest expense

Amortization expense

Total periodic expense

Balance sheet: ROU asset Lease liability

Prepare the journal entries at the lease commencement and for Year 1 of the lease term.

Please show how to calculate the interest expense numbers coming. Include calculations: On your amortization schedule, the $50,000 should be at the commencement date, then year one should calculate interest, but with no payment, payments begin in year 2. In your amortization schedule, include formulas; the total periodic expense should be a sum/calculation and not a hard-keyed number here. The initial amount should be the ROU asset, less the initial cash payment. Then that increases with the interest expense and decreases with the lease payments each year.