1. Trevor Corporation entered into a lease agreement on January 1, 2016, to provide Jensen Company with an equipment. The terms of the lease agreement were as follows.

1. The lease is to be for 3 years with rental payments of $19,234 to be made at the beginning of each year.

2. The machinery has a fair value of $55,000, a cost of $40,000, and an economic life of 8 years.

3. At the end of the lease term, both parties expect the machinery to have no residual value.

4. The lease does not transfer ownership at the end of the lease term, does not have a bargain purchase option, and the asset is not of a specialized nature.

5. The implicit rate of Trevor is 5%, which is known to Jensen.

6. Collectibility of the payments is probable.

Instructions

(a) Show how the lease payment is derived by the lessor and discuss the nature of this lease for the lessee (Jensen) and lessor (Trevor).

(b) Prepare the lease related journal entries for Jensen (the lessee) for 2016, 2017 and 2018. Jensen uses the straight method to depreciate the equipment over its lease term.