The Adden Company signs a lease agreement dated January 1, 2007 that provides for it to lease heavy equipment from the Scott Rental Company beginning January 1, 2007. The lease terms, provisions, and related events are as follows:
1. The lease term is four years. The lease is non-cancelable and requires annual rental payments of $20,000 each to be paid in advance at the beginning of each year.
2. The cost, and also fair value, of the heavy equipment to Scott at the inception of the lease is $68,036.62. The equipment has an estimated life of four years and has a zero estimated residual value at the end of this time.
3. Adden Company agrees to pay all executory costs.
4. The lease contains no renewal or bargain purchase option.
5. Scott’s interest rate implicit in the lease is 12%. Adden Company is aware of this rate, which is equal to its borrowing rate.
6. Adden Company uses the straight-line method to record depreciation on similar equipment.
7. Executory costs paid at the end of the year by Adden Company are:
2007 2008
Insurance, $1,500 ………..……Insurance, $1,300
Property taxes, $6,000 .......Property taxes, $5,500
Required
1. Determine what type of lease this is for Adden Company.
2. Prepare a table summarizing the lease payments and interest expense for Adden Company.
3. Prepare journal entries for Adden Company for the years 2007 and 2008.