Horton Company, as lessee, enters into a lease agreement on July 1, 2008, for equipment. The following data are relevant to the lease agreement: 1. The term of the non-cancelable lease is 4 years, with no renewal option. Payments of 422,689 are due on June 30, of each year. 2. The fair value of the equipment on July, 2008 is 1,400,000. The equipment has an economic life of 6 years with no salvage value. 3. Horton depreciates similar machinery it owns on the sum-of-the year's digits basis. 4. The lessee pays all executory costs. 5. Horton's incremental borrowing rate is 10% per year. The lessee is aware that the lessor used an implicit rate of 8% in computing the lease payments (present value factor for 4 periods at 8%,3.31213; at 10% 3.16986.
a) Indicate the type of lease Horton Company has entered into and what accounting treatment is applicable.
b) Prepare the journal entries on Horton's books that relate to the lease agreement for the following dates: (round all amounts to the nearest dollar. Include a partial amortization schedule)
July 1, 2008
December 31, 2008
June 30, 2009
December 31, 2009

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