Alexis Computer Company manufactures and sells or leases various types of computer equipment. On 1/1/17, Alexis leased a complete computer system to Edgar Enterprises. Data relating to the lease follow:

Cost of equipment to Alexis $ 80,000

Fair market value of equipment at 1/1/17 $ 98,000

Useful life of equipment 8 years

Lease term 5 years

Residual value at the end of the lease

(not guaranteed by Edgar) $ 15,000

Implicit and incremental interest rates 10%

Initial direct costs incurred in negotiation $ 1,000

Both the lessor and lessee use straight-line depreciation and have accounting periods that end on 12/31.

Required:

a. Calculate the yearly payment that Alexis will charge Edgar under this lease agreement if payments are made on 1/1 of each year, beginning 1/1/17.

b. Prepare all journal entries that would be made by Alexis (lessor) during 2017 and 2018 relating to this lease.

c. Prepare all journal entries that would be made by Edgar (lessee) during 2017 and 2018 relating to this lease.

d. Prepare the journal entries made by both Alexis and Edgar with respect to the lease termination if the actual residual value of the computer equipment is $12,500.

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