The following facts pertain to a noncancelable lease agreement between Lennox Leasing Company and Gill Company, a lessee.

Inception date: .................. May 1, 2012

Annual lease payment due at the beginning of each year, beginning

with May 1, 2012 ................ $18,829.49

Bargain-purchase option price at end of lease term ..... $ 4,000.00

Lease term ...................... 5 years

Economic life of leased equipment ............ 10 years

Lessor’s cost .................. $65,000.00

Fair value of asset at May 1, 2012 .......... $81,000.00

Lessor’s implicit rate .................. 10%

Lessee’s incremental borrowing rate ............ 10%

The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executor costs.

Instructions

(Round all numbers to the nearest cent.)

(a) Discuss the nature of this lease to Gill Company.

(b) Discuss the nature of this lease to Lennox Company.

(c) Prepare a lease amortization schedule for Gill Company for the 5-year lease term.

(d) Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2012 and 2013. Gill’s annual accounting period ends on December 31. Reversing entries are used by Gill.