Problems On January 1, 2021, RotoRooter enters into a lease agreement with the local Ford dealer for the lease of ten vehicles. Following are the terms of the lease:

A. It is a 7-year, non-cancelable lease with annual payments at the beginning of every year, starting on January 1, 2021.

B. Collectibility of lease payments is probable.

C. Executory costs of $5,500 per year are paid by the lessee and added to the annual lease payment.

D. The fair value of the vehicles on January 1, 2021 is $750,000. The dealer is carrying the vehicles in their Inventory at $575,000.

E. The vehicles have an estimated economic life of 9 years, with a $15,000 residual value. RotoRooter depreciates similar vehicles on the straight-line method.

F. At the termination of the lease, the asset reverts to the lessor (with no renewal options) and RotoRooter guarantees a residual value of $50,000.

G. RotoRooters incremental borrowing rate is 7.5%. The dealer set the annual rental to insure a 8% rate of return. The implicit rate of the lessor is not known by the lessee.

Questions to answer 1. What type of lease will RotoRooter classify this as? What type of lease will the dealer classify it as?

2. What is the annual lease payment (including executory costs)?

3. Please draft all of the journal entries and adjusting journal entries for the first year of the lease, first from the lessees and then the lessors perspective.

4. Please create a schedule to amortize the payments using the effective interest method from the lessees perspective and from the lessors perspective.