On December 31, 2010, Lessor leased equipment to Lessee for a 4-year period ending December 31, 2014, at which time possession of the leased asset will revert back to Lessor. Lessor paid 731,520 (the normal sales price and fair value) for the equipment which has a useful life of 6 years. The lessee-guaranteed residual value at December 31, 2014, is $50,000. Equal payments under the lease are $200,000 and are due on December 31 of each year. The first payment was made on December 31, 2010. Collectability of the remaining lease payments is reasonably assured and there are no material cost uncertainties. The interest rate implicit in the lease payments is 10%. Both companies use straight-line depreciation.
Required:
1) Show how Lessor calculated the $200,000 annual lease payments.
2) How should this lease be classified (a) by Lessee (b) by Lessor? Why?
3) Prepare the appropriate journal entries for both Lessee and Lessor on December 31, 2010.
4) Prepare an amortization schedule(s) describing the pattern of interest over the lease term for the Lessee and the Lessor.