Reference no: EM133099799

Question - Oriole Company, as lessee, enters into a lease agreement on July 1, 2021, for equipment. The following data are relevant to the lease agreement:

1. The term of the noncancelable lease is 4 years, with no renewal option. Payments of $869,129 are due on July 1 of each year.

2. The fair value of the equipment on July 1, 2021 is $3,150,000. The equipment has an economic life of 6 years with no salvage value.

3. Oriole depreciates similar machinery it owns on the sum-of-the-years'-digits basis.

4. The lessee pays all executory costs.

5. Oriole's incremental borrowing rate is 9% per year. The lessee is aware that the lessor used an implicit rate of 7% in computing the lease payments.

Required -

(a) Indicate the type of lease Oriole Company has entered into and what accounting treatment is applicable.

(b) Prepare the journal entries on Oriole's books that relate to the lease agreement for the following dates:

1. July 1, 2021.

2. December 31, 2021.

3. July 1, 2022.

4. December 31, 2022.