Reference no: EM133077661

Question - Pillow Corp. enters into a lease agreement on July 1, 2012, for equipment. Pillow Corp. is the lessee. 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, 2012 is $3,150,000. The equipment has an economic life of 6 years with no salvage value.

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

4. The lessee pays all executory costs.

5. Pillow Corp '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 -

1. Indicate the type of lease Pillow Corp. has entered into and what accounting treatment is applicable.

2. Prepare the journal entries on Pillow Corp's books that relate to the lease agreement for the following dates: July 1, 2012, December 31, 2012, July 1, 2013, and December 31, 2013. Please show all of your work in the calculations of each amount and a full lease amortization schedule.