Tam Leasing Company agreed with Lex Corporation to provide the latter with equipment under lease for a three-year period. The equipment cost Tam $120,000 and will have no residual value when the lease term ends. Tam expects to collect all payments from Lex and has no material cost uncertainties. The carrying value of the equipment was $120,000 at the inception of the lease. The three equal annual payments (amount to be determined) are to be paid each January 1, starting January 1, 1998 (at which time the equipment was delivered). Lex has agreed to pay taxes, maintenance. and insurance throughout the lease term as well as any other ownership costs. Tam expects a 20 percent return (known to Lex). The accounting year of' both companies ends December 31.
Required:
Round to the nearest dollar.
I. What kind of lease is this to Lex? To Tam?
2. Compute the annual payments and prepare an amortization schedule reflecting the interest and principal elements of Lex's payments over the three-year term of the lease. Give all journal entries relating to the lease for Lex Corporation for 1998 including year-end adjusting entries.
3. Give all journal entries for Tam Leasing Company relating to the lease for 1998 including year-end adjusting entries.