ACCOUNTING FOR LEASES

This equipment is NOT considered a specialized one.

Start date: January 1, 2020

Contract term: 3 years (The contract ends on December 31, 2022.) Title to the property will be transferred to the tenant free of charge when the third year ends.

Annual payments: $ 37,174 due January 1 of each year. The first payment was made on 1/1/20.

Estimated useful life for the asset: 4 years. Estimated residual value: zero.

Landlord interest rate: 12%, the tenant does NOT know it.

Renter's Incremental Borrowing Rate: 10%. The fair value of the asset is $ 100,000.

REQUIRED:

1. Prepare the journal entries that the LESSOR will have to record on January 1, 2020 assuming that the original acquisition cost that the lessor paid for the equipment was $ 90,000

2. Prepare the journal entries that the TENANT will have to record on January 1, 2020.