On January 1, 20X1, Bill Inc. leases manufacturing equipment from Beatrix Corporation. The lease covers seven years and requires annual lease payments of $51,000, beginning on January 1, 20X1. The unguaranteed residual value at the end of seven years is $150,000. On January 1, 20X1, the equipment has a fair value of $361,837 and an estimated life of 10 years. Bill’s incremental borrowing rate is 9%. Bill’s accounting year ends on December 31, and the company depreciates its other equipment on a straight-line basis.

Required:

1. Show why this is an operating lease for Bill Inc.

2. Prepare an amortization table for the lease.

3. Prepare Bill’s journal entries from the inception of the lease through December 31, 20X2. Be sure to make any necessary reclassifications to current liabilities at the end of each reporting period.

4. Compute and label the amounts to be shown on the balance sheet and income statement for the years ended December 31, 20X1, and December 31, 20X2.

5. Show how the income statement and balance sheet would differ for 20X1 and 20X2 if the lease were treated as a finance lease.