Sky Mountain, as lessee, enters into a lease agreement on May 1, 2020, for an Animal Outfit with Outfit Inc. The following data are relevant to the lease agreement:

• The term of the noncancelable lease is 10 years, with no renewal option. Payments of $140,000 are due at the beginning of each year, starting today.
• The fair value of the outfit is $1,000,000 (a quite unique costume). The outfit has an economic life of 13 years with no salvage value.
• Sky Mountain depreciates similar outfits on a straight-line basis.
• $2,000 Executory costs are paid by the lessee on an annual basis, of which are included in the above rent payment to the lessor.
• Sky Mountains incremental borrowing rate is 8% per year and the implicit rate is unknown.

Instructions:

1. Indicate the type of lease Sky Mountain has entered into. (2 points): ______________________
2. Prepare a partial amortization schedule for the lessee that goes up to 5/1/22. (4 points)

Date	Lease payment	Executory Costs	interest expense	reduction in liability	lease liability
5/1/20
5/1/20
5/1/21
5/1/22

Prepare the journal entries on Sky Mountains books that relate to the lease agreement for the following dates: 5/1/20 (2 JEs), 12/31/20 (2 JEs), and 5/1/21 (1 JE).

Prepare the journal entries on Outfit Incs books that relate to the lease agreement for the following date: 5/1/20 (2 JEs)