Calder Company, the lessor, enters into a lease with Darwin Company, the lessee, to provide heavy equipment beginning January 1, 2007. The lease terms, provisions, and related events are as follows:

The lease is non-cancelable, has a term of eight years, and has no renewal or bargain purchase option. The annual rentals are $65,000, payable at the end of each year. The interest rate implicit in the lease is 15%. The Darwin Company agrees to pay all executory costs.

The cost and fair value of the equipment to the lessor is $308,021.03. The lessor incurs no material initial direct costs. The collectibility of the rentals is reasonably assured, and there are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor. The lessor estimates that the fair value at the end of the lease term will be $50,000 and that the economic life of the equipment is nine years. The following present value factors are relevant:

PVn=8,i=15% = 4.487322; PVn=8,i=15% = 0.326902; PVn=1,i=15% = 0.869565

Required

1. Prepare a table summarizing the lease receipts and interest revenue earned by the lessor for this direct financing lease.

2. State why the lease is a direct financing lease.

3. Prepare journal entries for Calder Company for the years 2007, 2008, and 2009.

4. Prepare partial balance sheets for December 31, 2007 and December 31, 2008 showing how the accounts should be reported.