Final answer:
This lease should be classified as a finance lease because the lease term covers a major part of the asset's economic life. The lease schedule can be prepared by calculating the lease payments and interest expense over the lease term. The necessary journal entries for July 1, 2019, involve recording the initial recognition of the lease liability and the right-of-use asset, while on June 30, 2020, the journal entries include recording depreciation expense and interest expense.
Step-by-step explanation:
To determine whether this lease should be classified as a finance lease, we need to consider if it meets any of the criteria outlined in accounting standards. One of the criteria for classification as a finance lease is if the lease term covers a major part of the asset's economic life. In this case, the lease term is 8 years out of the asset's estimated useful life of 12 years, which covers more than 75% of the asset's economic life. Therefore, it can be classified as a finance lease.
To prepare the lease schedule, we need to calculate the lease payments and interest expense over the lease term. The lease payments consist of the annual rental payment of $50,397 and the executory costs of $2,500. The interest rate to be used is the lower of the lessee's incremental borrowing rate (8%) or the lessor's implicit rate (9%). Based on these inputs, we can calculate the lease schedule and the amounts for each year.
To prepare the necessary journal entries for July 1, 2019, we need to record the initial recognition of the lease liability and the right-of-use asset. The lease liability is the present value of the lease payments, which can be calculated using the interest rate and the lease term. The right-of-use asset is initially recognized at the lower of the fair value of the asset or the present value of the lease payments. On June 30, 2020, we need to record the depreciation expense for the year and the interest expense for the year, as well as any adjustments for the executory costs.