Sondheim Limited entered into a direct financing lease with New Age Leasing Corporation. The lease is for new specialized factory equipment that has a fair value of \(\$ 4,800,000\). The expected useful life of the equipment is 15 years, although its physical life is far greater. The initial lease term begins on 1 April \(20 \mathrm{X} 2\) and runs for 10 years. Annual lease payments are \(\$ 600,000\), payable at the beginning of each lease year. After the initial lease term, Sondheim has the option of renewing the lease on a year-by-year basis for as long as Sondheim wishes. Since the equipment will be obsolete by that time, the renewal is set at \(\$ 15,000\) per year, which is expected to be a fair rental value for equipment of that age. Other information is as follows:

- Sondheim's incremental borrowing rate is \(6 \%\).

- The implicit pre-tax interest rate in the lease is \(7 \%\), but this rate is not known to Sondheim.

- Sondheim will amortize the equipment on a straight-line basis, charging half-year depreciation in the first year.

Required:

1. Prepare the journal entries relating to the lease liability and the leased equipment for Sondheim for 20X2 including all appropriate adjusting entries. Use the net method of recording.

2. What amounts will appear on Sondheim's statement of financial position and statement of cash flows at 31 December 20X2? Assume that Sondheim uses the indirect approach to determining cash flow from operating activities.
3. Prepare the journal entries relating to the lease for New Age for 20X2. Use the gross method of recording. What is the net amount of lease receivable that will appear on New Age's statement of financial position on 31 December 20X2?