The following facts pertain to a non-cancelable, manufacturing equipment lease agreement between ABC (lessor) and XYZ (lessee) companies. Both companies have December 31st fiscal year ends.

The present value of the equipment at the inception of the lease on January 1, 2014 was $89,302.

The expected residual value at the end of the 5 year lease (January 1, 2019) was $23,900 and the value is guaranteed by the LESSEE.

The lessees incremental borrowing rate is equal to the lessors implicit rate of 6%.

The economic life of the leased equipment is 8 years.

ABC sets the lease payments so that they will recover 100% of the fair market value of the lease over the 5 year lease term. The first least payment is made on January 1, 2014 at the inception of the lease.

Required

1. Compute the annual lease payments ABC will require XYZ to pay.

2. Prepare an amortization schedule for the life of the lease.

3. Prepare all entries made by XYZ (lessee) for 2014 related to the lease, and also for the lease payment made the following year (January 1, 2015).

4. Prepare all entries made by ABC (lessor) for 2014 related to the lease, assuming the lease is a direct financing lease. Also, record the lease payment made the following year (January 1, 2015).

5. Prepare the entries made by each party for the return of the equipment on January 1, 2019, assuming that actual value of the equipment at that time was $20,000.