Loco Leasing and Manufacturing Company uses leases as a means of financing sales of its equipment. Loco leased a machine to Potomac Construction for $15,000 per year, payable in advance, for a 10-year period. The cost of the machine to Loco was $86,000. The fair value at the date of the lease was $100,000. Assume a residual value of $0 at the end of the lease.

1. Give the entry required to record the lease on Loco’s books.

2. How much profit will Loco recognize initially on the lease, excluding any interest revenue?

3. How much interest revenue would be recognized in the first year?