On January 1, 2011, Linda Lou Foods, Inc., leased a tractor. The lease agreement qualifies as a capital lease and calls for payments of $10,000 per year (payable each year on January 1, starting in 2012) for eight years. The annual interest rate on the lease is 10%. Linda Lou Foods uses a calendar-year reporting period.

Required:

1. Prepare the journal entries for the following dates:

a. January 1, 2011, to record the leasing of the tractor

b. December 31, 2011, to recognize the interest expense for the year 2011

c. January 1, 2012, to record the first lease payment

2. Prepare the appropriate journal entries at December 31, 2012, and January 1, 2013.

3. Interpretive Question: Explain briefly how the leased asset is accounted for annually.