The Company, as lessee, enters into a lease agreement on January 1, 2014, for equipment. The following data are relevant to the lease agreement:

1. The term of the noncancelable lease is 5 years, with no renewal option. Payments are due on January 1 of each year.

2. The fair value of the equipment on January 1, 2014 is $2,700,000. The equipment has an economic life of 6 years with no salvage value.

3. The company depreciates similar machinery it owns on the straight-line basis.

4. The lessee pays annual executory costs of $25,000 to the Lessor on July 1 each year.

5. The company's incremental borrowing rate is 10% per year. The lessee is aware that the lessor used an implicit rate of 8% in computing the lease payments (present value factor for 4 periods at 8%, 3.57710; at 10%, 3.48685.

Instructions

(a) Indicate the type of lease the company has entered into and what accounting treatment is applicable.

(b) Prepare the journal entries on the company's books that relate to the lease agreement for the following dates: (Round all amounts to the nearest dollar. Include a partial amortization schedule.)

1. January 1, 2014.

2. December 31, 2014.

3. January 1, 2015.

4. December 31, 2015.