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

Inception date: May 1, 2014

Annual lease payment due at the beginning of

each year, beginning with May 1, 2014 ........ $21,227.65

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, 2014 ............ $91,000.00

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

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

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

(c) Prepare a lease amortization schedule for Rode 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 2014 and 2015. Rode’s annual accounting period ends on December 31. Reversing entries are used by Rode.