On January 1, 2020, Mays Leasing Company leases equipment to Brick Co. The lease term is five years, with 5 equal annual payments of $160,000 each, beginning on 1/1/2020. The equipment has an estimated economic life of 8 years and the fair value on 1/1/2020 is $800,000. Brick agrees to guarantee $150,000 residual value at the end of the lease term. The expected value of the residual value is $50,000. At the termination of the lease, the equipment reverts to the lessor. Bricks incremental borrowing rate is 10% and Brick knows that Mays implicit interest rate is 8%.

Present value factors: Ordinary Annuity Annuity Due A Single Sum

5 periods 8% 3.99271 4.31213 0.68058

5 periods 10% 3.79079 4.16986 0.62092

1. Use lease classification tests to determine the type of lease that Brick Co. has entered into.
2. Construct the lease amortization schedule for the first two payments made by Brick Co.
3. Prepare Bricks journal entries that relate to the lease agreement for the following three dates: January 1, 2020, December 31, 2020, and January 1, 2021.