1. The term of the noncancelable lease is 4 years, with no renewal option. Payments are due on January 1 of each year.
2. The fair value of the equipment on January 1, 2012 is $2,800,000. The equipment has an economic life of 6 years with no salvage value.
3. Chariott depreciates similar machinery it owns on the straight line basis.
4. The lessee pays all executory costs to the lessor annually on December 31st in the amount of $40,000.
5. Chariott'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%, 3.31213; at 10%, 3.16986.
6. Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by Rhodes, Inc..
(a) Indicate the type of lease Chariott Company has entered into and what accounting treatment is applicable.
(b) Prepare a lease amortization schedule for the lessor for the first two years (2012-2013). (Round all amounts to nearest dollar.)
(c) Prepare the journal entries on Chariott's books that relate to the lease agreement for the first 2 years (2012 and 2013). Round all amounts to the nearest dollar. Include a partial amortization schedule.
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