A capital lease agreement for equipment requires Granger Transport Ltd. to make 10 annual payments of $40,000, with the first payment due on January 2, 2017, the date of the inception of the lease. The present value of the nine future lease payments at 10 percent is $230,360.

Required

1. Calculate the present value of the lease at 5 percent if your instructor has taught present value.

2. Journalize the following lessee transactions:

2017

Jan. 2 Beginning of lease term and first annual payment.

Dec. 31 Amortization of equipment (10 percent).

31 Interest expense on lease liability.

2018

Jan. 2 Second annual lease payment.

3. Assume now that this is an operating lease. Journalize the January 2, 2017, lease payment.