Reporting Operating LeaseLessee

On January 1, 2020, Lessee Inc. leased equipment at an annual payment of $221,257 payable at the beginning of each year for 4 years. The equipment had a fair value of $1,040,000, a book value of $975,000, and was commonly purchased or leased by customers. The lessor estimates that the equipment has an estimated useful life of 8 years and an estimated residual value of $325,000, not guaranteed by the lessee. Lessors implicit rate is 7.5%, which is unknown to the lessee. The lessees incremental borrowing rate is 8%. The lease does not contain a purchase option or a renewal option. The lessee had no other costs associated with this lease.

Prepare an amortization schedule of the lease liability.

Prepare an amortization schedule of the right-of-use asset.

Prepare the entries for Lessee Inc. for the years 2020 and 2021, assuming Lessee Inc.s accounting year ends December 31.