Recording Entries for Finance LeaseNo Residual, Renewal Terms

On January 1 of Year 1, Lessee Inc. enters into a five-year equipment lease agreement. Lease payments are $27,000, due annually, each January 1 (first payment due immediately). The lease grants the lessee an option to renew the lease for an additional three years. Lease payments adjust to current market rates for equivalent rentals at the time of renewal. Lessee Inc. is reasonably certain that it will exercise the renewal option. The estimated useful life of the equipment is 10 years. The lessee is not aware of the implicit rate of the lease, but the lessees incremental borrowing rate is 6%.

Required

a. How would Lessee Inc. classify the equipment lease?

b. Prepare a schedule of the lease liability for the first two years of the lease term. Note: Round each amount in the schedule to the nearest whole dollar. Use the rounded amount for later calculations in the schedule.

c. Prepare the entries for Lessee Inc. on (1) January 1 of Year 1, (2) December 31 of Year 1, (3) January 1 of Year 2, and (4) December 31 of Year 2.

Note: Round each amount to the nearest whole dollar.

b. Prepare a schedule of the lease liability for the first two years of the lease term. - Note: Round each amount in the schedule to the nearest whole dollar. Use the rounded amount for later calculations in the schedule. c. Prepare the entries for Lessee Inc. on (1) January 1 of Year 1, (2) December 31 of Year 1, (3) January 1 of Year 2, and (4) December 31 of Year 2. - Note: Round each amount to the nearest whole dollar