Branif Leasing leases mechanical equipment to industrial consumers under direct financing leases that earn Branif a 10% rate of return for providing long-term financing. A lease agreement with Branson Construction specified 20 annual payments of $100,000 beginning December 31, 2011, the inception of the lease. The estimated useful life of the leased equipment is 20 years with no residual value. Its cost to Branif was $936,500. The lease qualifies as a capital lease to Branson. Maintenance of the equipment was contracted for through a 20-year service agreement with Midway Service Company requiring 20 annual payments of $3,000 beginning December 31, 2011. Both companies use straight-line depreciation.

Required:

Prepare the appropriate entries for both the lessee and lessor to record the second lease payment and depreciation on December 31, 2012, under each of three independent assumptions:

1. The lessee pays executory costs as incurred.

2. The contract specifies that the lessor pays executory costs as incurred. The lessee's lease payments were increased to $103,000 to include an amount sufficient to reimburse these costs.

3. The contract specifies that the lessor pays executory costs as incurred. The lessee's lease payments were increased to $103,300 to include an amount sufficient to reimburse these costs plus a 10% management fee for Branif.