Recording Entries for Finance LeaseNo Residual, Payments Increase at a Defined Rate

On December 30, 2019, Drew Company leased equipment under a lease for a period of 5 years. Drew contracted to pay $108,000 on December 31, 2019, with an annual increase of 3% (calculated on the previous years lease payment) for each of the next four years due on December 31. The leased equipment has a useful life of 7 years, a fair value of $540,000, and the interest rate implicit in the lease is 8% and is known to Drew Company.

a. How would Drew Company classify the lease?

b. Prepare an amortization schedule of the lease liability. Note: Round each amount in the schedule to the nearest whole dollar. Use the rounded amount for later calculations in the schedule. Note: Include any net rounding difference to Lease Liability in the Interest on Liability amount for Dec. 31, 2023. Lease Payment Date Dec. 31, 2019 Dec. 31, 2019 $ Dec. 31, 2020 Dec. 31, 2021 Dec. 31, 2022 Dec. 31, 2023 Total $ Interest Reduction of on Liability Lease Liability Lease Liability $ 0 $ 0 0 0 0 OS 0 S 0 0 0 0 0 $ 0 0 0 0 0 0 0 0 0 0 0 OO 0 c. Prepare the entries for Drew Company for years 2019, 2020 and 2021. Note: Round your answers to the nearest whole dollar. Note: List multiple debits or credits (when applicable) in alphabetical order. Account Name Date Dec. 31, 2019 Dec. 31, 2019 Dec. 31, 2020 Dec. 31, 2020 Dec. 31, 2021 Dec. 31, 2021 To record asset and liability related to lease To record lease payment To record interest To record amortization To record lease payment To record amortization A 4 ( 00 O Dr. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Cr. 0 0 0 0 0 0 OO 0 0 0 0 OO 0 0 0 0