On January 1, 20X1, Trask Co. signs an agreement to lease office equipment from Coleman Inc. for three years with payments of $193,357 beginning December 31, 20X1. The equipment’s fair value is $500,000 with an expected useful life of four years. At the end of three years, the equipment is expected to have a $50,000 residual value, which Trask does not guarantee. Both Trask and Coleman use a 12% rate of return in evaluating this transaction. Trask uses straight-line depreciation.

Required:

1. Why is this a finance lease for Trask?

2. Prepare a schedule to amortize the lease liability. Round the amount of the initial lease liability to the nearest dollar and all amounts in the schedule to the nearest cent.

3. Prepare the journal entries required on Trask’s books for 20X1 and 20X3. You do not need to make the journal entries to reclassify part of the lease liability to a current liability

4. Assume now that Trask guarantees the residual value. Prepare an amortization table and the journal entries necessary on Trask’s books for 20X1 and 20X3. Further assume that the equipment’s residual value on December 31, 20X3, is $40,000.