Reporting Operating LeaseLessee

On January 1 of Year 1, Lessee Inc. leased equipment at an annual payment of $187,218, payable each January 1 for four years, with the first payment due immediately. The equipment had a fair value of $880,000 and a book value of $825,000, and was commonly purchased or leased by customers. The lessor estimates that the equipment has an estimated useful life of eight years and an estimated residual value of $275,000, 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.

Required

a. How would Lessee Inc. classify the lease?

b. Prepare a schedule of the lease liability for the 4-year 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 a schedule of the right-of-use asset for the 4-year lease term. Note: Round each amount in the schedule to the nearest whole dollar. Use the rounded amount for later calculations in the schedule.

d. Prepare the entries for Lessee Inc. on January 1 and December 31 of the first two years of the lease term, assuming Lessee Inc.s accounting year ends December 31.

Note: Round your answers to the nearest whole dollar.

\begin{tabular}{|c|c|c|c|c|c|c|c|c|c|c|} \hline Date & & LeaseExpense & & & InterestonLiability & & & ght-of-UseAssetChange & & Right-of-UseAsset \\ \hline Jan. 1, Year 1 & & & & & & & & & $ & 0x \\ \hline Year 1 & $ & & x & $ & 0 & x & $ & 0x & $ & 0x \\ \hline Year 2 & $ & & x & $ & 0 & x & $ & 0x & $ & 0x \\ \hline Year 3 & $ & 0 & x & $ & 0 & x & $ & 0 & $ & 0 \\ \hline Year 4 & $ & 0 & x & & 0 & & $ & 0x & $ & 0 \\ \hline Total & $ & $ & 0 & & $ & 0 & $ & 0 & & \\ \hline \end{tabular} \begin{tabular}{|c|c|c|c|c|c|c|c|c|c|} \hline Date & LeasePayment & & & InterestonLiability & & & LeaseLiabilityChange & & LeaseLiability \\ \hline Jan. 1, Year 1 & & & & & & & & $ & 0x \\ \hline Jan. 1, Year 1 & $ & 0x & & 0 & & $ & 0x & $ & 0x \\ \hline Jan. 1, Year 2 & $ & 0x & & 0 & x & $ & 0x & $ & 0x \\ \hline Jan. 1, Year 3 & $ & 0x & & 0 & x & $ & 0x & $ & 0 \\ \hline Jan. 1, Year 4 & $ & 0 & & 0 & x & $ & 0 & $ & 0 \\ \hline Total & $ & 0 & & $ & 0 & $ & 0 & & \\ \hline \end{tabular} \begin{tabular}{|c|c|c|c|c|} \hline Date & Account Name & Dr. & Cr. & \\ \hline \multirow[t]{3}{*}{ Jan. 1, Year 1} & & 0 & 0 & 0x \\ \hline & & 0 & 0 & 0x \\ \hline & To record lease liability and right-of-use asset & & & \\ \hline \multirow[t]{3}{*}{ Jan. 1, Year 1} & & 0 & 0 & 0x \\ \hline & & 0 & 0 & 0x \\ \hline & To record lease payment & & & \\ \hline \multirow[t]{4}{*}{ Dec. 31, Year 1} & & 0 & 0 & 0 \\ \hline & & 0 & 0 & 0x \\ \hline & & 0 & 0 & 0x \\ \hline & Torecordleaseexpense & & & \\ \hline \multirow[t]{3}{*}{ Jan. 1, Year 2} & & 0 & 0 & 0x \\ \hline & & 0 & 0 & 0x \\ \hline & To record lease payment & & & \\ \hline \multirow[t]{4}{*}{ Dec. 31, Year 2} & & 0 & 0 & 0x \\ \hline & & 0 & 0 & 0x \\ \hline & & 0 & 0 & 0x \\ \hline & To record lease expense & & & \\ \hline \end{tabular}