On January 1 of year 1, Mason Co. entered into a 3-year lease on a building. The lease contract requires annual (prepaid) rental payments of $21,000 each January 1 throughout the life of the lease and for the lessee to pay for all additions and improvements to the leased property. Present value of the three lease payments is $60,000.

Required

1. Assume the lease is accounted for as a finance lease. Prepare entries for Mason to record (a) the lease asset and obligation at January 1, year 1, and (b) the $20,000-per-year straight-line amortization at December 31 of years 1, 2, and 3.

2. Assume the lease is accounted for as an operating lease. Prepare entries for Mason to record (a) the lease asset and obligation at January 1, year 1, and (b) the annual straight-line amortization at December 31 of years 1, 2, and 3 equal to $19,016, $19,984, and $21,000, respectively.