On January 1, 2021, SP Company signed a 4-year lease for a car. The terms of the lease called for SP Company to make annual payments of $2,000 at the beginning of each year, starting January 1, 2021. The car has a book value of 10,000 (the FMV at the leasing date was $8,000) an estimated useful life of 5 years and a $1,000 unguaranteed residual value. SP Company uses the straight-line method of depreciation for all of its plant (fixed) assets. SP Companys incremental borrowing rate is 20%.

Instructions

1. What type of lease is this? Explain.
2. If present value of the minimum lease payments is $7,768;

• Prepare the Lease Amortization Schedule.
• Prepare the journal entries on January 1, 2021.

3. Prepare all journal entries through Dec. 31, 2021 and January 1, 2022.