On January 1, 2021, Ohio Supply Company leased equipment from Jones Manufacturing

Corporation. The lease term requires Ohio Supply to make equal annual lease payments on

January 1, 2021 and then December 31, 2021 through December 31, 2023 (i.e., the lease term is

four years). The estimated economic life of the asset and residual value are five years and

$40,000, respectively. The estimated residual value at the end of the assets economic life is

$10,000. Ohio Supply Company uses straight-line depreciation. The cost and fair value of the

equipment is $450,000. The lease allows Ohio Supply to purchase the equipment for $5,000 at

the end of the lease term. The implicit interest rate and incremental borrowing rates are both 6%.

There are no important cost or collection uncertainties for Jones Manufacturing Corporation.

REQUIRED:

1. Compute the annual rental payments on the lease.

2. What type of lease is this for Ohio Supply and Jones Manufacturing? (Support

your answer using the required tests.)

3. Prepare the journal entries for 2021 for both parties.