12.Morey Corporation leases a tractor from Equity Leasing with a five-year non-cancelable lease on January 1, 20X1 under the following terms:

1. Five payments of $26,379.74 (a 9% implicit rate, known to Morey) due at the end each year.
2. The payments were calculated based on the fair value (which is also the book value for Equity) of the tractor.
3. The lease is nonrenewable and the tractor reverts to Equity at the end of the lease term.
4. The tractor has a six-year economic life.
5. Morey has an excellent credit rating.
6. Equity offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer.

With which of the following entries will Morey prepare for the second payment December 31, 20X2?

Multiple Choice

• DR Finance lease liability 26,379.74 CR Cash 26,379.74
• DR Finance lease liability 17,145.02 DR Interest expense 9,234.72 CR Cash 26,379.74
• DR Finance lease liability 18,688.08 DR Interest expense 7,691.66 CR Cash 26,379.74
• DR Finance lease liability 7,691.66 DR Investment in leased asset 18,688.08 CR Cash 26,379.74