On March 1, 20x1, Adams Corporation signed a 5-year noncancelable lease for a machine. The machine has a sales value of $45,000 and an estimated useful life of 7 years. The terms of the lease called for Adams to make annual payments of $9,968 each year, starting March 1, 20x1. Although the machine has a guaranteed $5,000 residual value at the end of the lease, Adams believes its actual residual value at that time will only be $2,000. The machine reverts back to the lessor at the end of the lease term. Adams incurred $500 in legal fees to finalize the lease contract. Adamss incremental borrowing rate is 10%, but the Lessors implicit rate is unknown (Adams doesnt know if or how much executory costs are contained in the lease payments). Both firms have a calendar year.

Instructions (a) What kind of lease is this to Adams?

(b) Prepare an amortization schedule for Adams related to the lease.

(c) Prepare all necessary journal entries for Adams for this lease through March 1, 20x2.

(d) Prepare the journal entry for Adams at the termination of the lease assuming the actual residual value at that time is $4,000.