Question 6: A company enters into a lease agreement with annual lease payments of $10,000 for 5 years. The company's incremental borrowing rate is 8%. Outline the journal entries and subsequent lease accounting treatment under the lessee's perspective using the capital lease method.

Requirements:

1. Determine whether the lease qualifies as a capital lease or an operating lease based on the criteria outlined in ASC 842.
2. Record the journal entry to recognize the capital lease at the inception of the lease term.
3. Post the journal entry to the Right-of-Use Asset and Lease Liability accounts in the ledger.
4. Calculate the present value of lease payments to determine the initial lease liability.
5. Record the journal entry to recognize interest expense and reduce the lease liability for the first lease payment.
6. Post the journal entry to the Interest Expense and Lease Liability accounts in the ledger.
7. Prepare an amortization schedule showing the reduction of the lease liability and recognition of interest expense over the lease term.
8. Analyze how these transactions affect the company's balance sheet and income statement.
9. Discuss the implications of capitalizing leases on financial ratios and performance metrics.
10. Illustrate how the capital lease method reflects the lessee's ownership of the leased asset and lease-related obligations in financial statements.