Jessica Johnson Logging Company is considering the acquisition of a new bulldozer. Big Dig, Inc. has offered to lease the equipment to Johnson Company for all 12 years of its useful life at annual year-end lease payments of $24,500. Each payment will include 9% interest. At the end of 12 years of lease payments, Big Dig, Inc. will allow Johnson to keep the bulldozer.

Required

A. At what amount should the bulldozer and lease obligation be recorded on Johnson’s books at the date of acquisition?

B. Prepare an amortization table covering only the first four years of the lease.

C. Explain why a $24,500 lease payment doesn’t cause the amount owed to decrease by $24,500.

D. Explain why Johnson’s interest expense gets smaller for each successive year of the lease.

E. Using the format presented in this chapter, record the entry to capitalize the bulldozer and lease obligation on Johnson’s books.

F. Using the format presented in this chapter, record the entry to recognize the first yearend lease payment.