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Blue Corporation leased equipment to Larkspur, Inc. on January 1, 2017. The lease agreement called for annual rental payments of $1,171 at the beginning of
Blue Corporation leased equipment to Larkspur, Inc. on January 1, 2017. The lease agreement called for annual rental payments of $1,171 at the beginning of each year of the 3-year lease. The equipment has an economic useful life of 7 years, a fair value of $7,600, a book value of $5,600, and Blue expects a residual value of $5,100 at the end of the lease term. Blue set the lease payments with the intent of earning a 6% return, though Larkspur is unaware of the rate implicit in the lease and has an incremental borrowing rate of 8%. There is no bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a specialized nature. Determine the nature of the lease to both Blue and Larkspur. The lease is a/an lease to Larkspur. The lease is a/an lease to Blue. Prepare all necessary journal entries for Larkspur in 2017. Date Account Titles and Explanation Debit Credit (To record the lease) To record lease liability) 12/31/17
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