Rex Corporation (lessor) and Lee Company (lessee) agreed to a non-cancelable lease. The following information is available regarding the lease terms and the leased asset:
a. Rex's cost of the leased asset was S40,000. The asset was new at lease inception date.
b. Lease term is four years, beginning January 1. 1998. Lease payments are made each January 1. beginning January 1, 1998.
c. Estimated useful life of leased asset is four years. Estimated residual value at end of lease is zero.
d. Sales price of leased asset on January 1, 1998, was $46,000.
e. Rex's implicit interest rate is 15 percent on retail price (known to Lee).
f. Rex expects to collect all payments from Lee, and there are no material cost uncertainties.
Required
1. What kind of lease is this to Rex? To Lee?
2. Compute the annual lease payments.
3. Prepare an amortization schedule for the lease.
4. Give the journal entries for both parties on January 1, 1998, and December 31, 1998. Do not make closing, entries.