On December 30, 2019, Drew Company leased equipment under a lease for a period of 5 years. Drew contracted to pay $63,000 on December 31, 2019, with an annual increase of 3% (calculated on the previous years lease payment) for each of the next four years due on December 31. The leased equipment has a useful life of 7 years, a fair value of $315,000, and the interest rate implicit in the lease is 8% and is known to Drew Company.

a. How would Drew Company classify the lease?

AnswerFinance LeaseOperating LeaseSales-Type Lease

• Amortization Schedule
• Journal Entries

b. Prepare an amortization schedule of the lease liability.

• Note: Round each amount in the schedule to the nearest whole dollar. Use the rounded amount for later calculations in the schedule.
• Note: Include any net rounding difference to Lease Liability in the Interest on Liability amount for Dec. 31, 2023.