Company A entered into a 10-year non-cancelable lease beginning Jan 1 2017 for equipment to use in its operations. The expected life of the equipment is 12 years. A Company uses Straight Line Depreciation for all plant assets. The provisions of the lease call for annual payments of $250,000 in advance, plus $35,000 per year to cover costs such as taxes and insurance, for the 10-year period of the lease. At the end of 10 years, Jack guarantees the residual value of 500,000. The expected residual value is $450,000.

The incremental borrowing rate of Jack Company is 11%. The lessor’s computed implicit rate is 12% and is known to the Lessee.

1. Record the lease on Company A’s book as of Jan 1 2017.

2. Record the first payment on Jan 1 2017.

3.Record the remaining entries for 2017 and 2018 assuming the second payment and subsequent payments are made on Jan 1.

4. Assume the lease term is 6 years and Company A classifies the lease as an operating lease. Prepare the Journal Entries for 2017 and 2018 with this new information.