Trucks for Sale Corp. (TFS) manufactures tractor-trailer units at a cost of $89,000 per unit. On January 1, 2019, TFS offered Nate’s Trucking Inc. (NTI) the option of buying a unit for $122,000 cash or leasing it from TFS. Pertinent details are: 

■ The lease offered was a four-year, non-cancellable agreement with the first payment due at the beginning of each year starting January 1, 2019. 

■ The estimated economic life of the tractor-trailer is 10 years. Its estimated residual value is $0. 

■ The lease does not include a renewal option. NTI has the option to purchase the unit at the expiration of the lease for $40,000. The estimated value at that time is $50,000. 

■ NTI’s incremental borrowing rate is 7.0%. It knows that the interest rate implicit in the lease is 6.0%. 

■ NTI depreciates similar equipment that it owns on a straight-line basis. 

■ Both companies have December 31 year ends.

Required:

a. Determine the amount of the lease payment that TFS will include in the lease agreement. 

b. Evaluate how TFS (the lessor) should account for the lease transaction.

c. Prepare the journal entries on January 1, 2019, December 31, 2019, and January 1, 2020, for TFS, the lessor. 

d. Prepare the journal entries on January 1, 2019, December 31, 2019, and January 1, 2020, for NTI, the lessee.