QUESTION ONE

Rentco leasing company enters into an agreement to lease equipment to EABL on $01$ January

$2020.$ The following details are available about the lease.

$$ The term of the non$-$cancellable lease is $5$ years with no renewal option. Theequipment

has an estimated economic life of $6$ years.

$$ The value of the asset as at $01$ January $2015$ is $$90,000$

$$ The asset is to revert to the lessor at the end of the lease term.

$$ EABL assumes the direct responsibility for all executory costs of $ $3,500$ being property

taxes and insurance.

$$ The agreement requires equal annual rental payments of $$20,5411\mathrm{.}11$ to the lessor

beginning $01$ January $2020.$

$$ The lessee$$s incremental borrowing cost is $12\%.$ The lessors implicit rate is $10\%$ and is

known by the lessee.

$$ EABL uses straight line depreciation method.

Required

a$)$ What type of lease is this? Justify your answer appropriately.

b$)$ Prepare the amortization schedule for the lease

c$)$ Prepare all journal entries for the lessee for $2020$ and $2021$ to record the lease, the lease

payments and all expenses related to the lease. Assume the accounting period for the

leseee ends on $31$ December.