On December 31, 2021, Newton LeaseCorp. leased equipment to Worcester Construction for a four-year period ending December 31, 2025, at which time possession of the leased asset will revert back to Newton LeaseCorp. The equipment cost Newton LeaseCorp. $347,516 and has an expected useful life of six years. Its normal sales price is $347,516. The lessee-guaranteed residual value at December 31, 2025, is $17,000. Equal payments under the lease are $95,000 and are due on December 31 of each year. The first payment was made on December 31, 2021. Worcester Constructions incremental borrowing rate is 10%. Worcester Construction knows the interest rate implicit in the lease payments is 9%. Both companies use straight-line depreciation.

Required:

1. Show how Newton LeaseCorp.calculated the $95,000 annual lease payments. 2. How should this lease be classified (a) by Worcester Construction (the lessee) and (b) by Newton LeaseCorp. (the lessor)? 3. Prepare the appropriate entries for both Worcester Construction and Newton LeaseCorp. on December 31, 2021. 4. Prepare an amortization schedule(s) describing the pattern of interest over the lease term for the lessee and the lessor. 5. Prepare all appropriate entries for both Worcester Construction and Newton LeaseCorp. on December 31, 2022 (the second lease payment and amortization). 6. Prepare the appropriate entries for both Worcester Construction and Newton LeaseCorp. on December 31, 2025 assuming the equipment is returned to Newton LeaseCorp. and the actual residual value on that date is $2,000.