On January 1, Rogers (lessee) signs a three-year lease for machinery that is accounted for as a finance lease. The lease requires three $18,000 lease payments (the first at the beginning of the lease and the remaining two at December 31 of Year 1 and Year 2). The present value of the three annual lease payments is $51,000, using a 6.003% interest rate. The lease payment schedule follows.

Required

1. Prepare the January 1 journal entry at the start of the lease to record any asset or liability.

2. Prepare the January 1 journal entry to record the first $18,000 cash lease payment.

3. Prepare the December 31 journal entry to record straight-line amortization with zero salvage value at the end of

(a) Year 1,

(b)Year 2,

(c) Year 3.

4. Prepare the December 31 journal entry to record the $18,000 cash lease payment at the end of (a) Year 1 and (b) Year 2.

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Payments (C) (B) (A) (D) (E) Credit Debit Debit Ending Balance Lease Liability = Cash Lease of Lease Liability (A) – (C) Interest on Beginning Balance Lease Liability + of Lease Liability 6.003% x (A) $51,000 33,000 (D) – (B) Date Payment Jan. 1, Year 1 Dec. 31, Year 1... Dec. 31, Year 2.. S18,000 $18,000 18,000 18,000 $33,000 16,981 16,019 $1,981 1,019 16,981 16,981 $3,000 $51,000 $54,000