Lessor Company and Lessee Company enter into a five year, non-cancelable, direct financing lease on January 1, 2007 for a new computer that cost the Lessor Company $400,000 (useful life is five years). The fair value is also $400,000. Lessor Company expects a 12% return over the five-year period of the lease. The computer will have an estimated unguaranteed residual value of $20,000 at the end of the fifth year of the lease. The lease provisions require five equal annual amounts, payable each January 1, beginning with January 1, 2007. The Lessee Company pays all executory costs. The computer reverts to the lessor at the termination of the lease. Assume there are no initial direct costs, no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor, and that the collectibility of rentals is reasonably assured.

Required

1. Show how the Lessor Company should compute the annual rental amounts.

2. Prepare a table summarizing the lease and interest receipts that would be suitable for the Lessor Company.

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