Phillips Company, as lessee, enters into a lease agreement on January 1, 2021, for equipment. The following data are relevant to the lease agreement:

The term of the non-cancelable lease is 4 years. Payments of $978,446 are due on January 1 of each year. The fair value of the equipment on January 1, 2021 is $3,500,000. The equipment has an economic life of 6 years with no salvage value. Phillips depreciates similar machinery using the straight-line method. The lessee pays all executory costs. Phillips incremental borrowing rate is 10% per year. The lessee is aware that the lessor used an implicit rate of 8% in computing the lease payments (present value factor for 4 periods at 8%, 3.57710; at 10%, 3.48685).

A. Indicate the type of lease Phillips Company has entered into based on the five tests and show your computations.

B. Prepare the journal entries on Phillips books that relate to the lease agreement for the following dates: (Round all amounts to the nearest dollar. Include a partial amortization schedule.) 1. January 1, 2021 2. December 31, 2021 3. January 1, 2022