Cheyenne Corporation leased equipment to Sage Hill, Inc. on January 1, 2017. The lease agreement called for annual rental payments of $1,112 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 $7,500, a book value of $5,500, and Cheyenne expects a residual value of $5,000 at the end of the lease term. Cheyenne set the lease payments with the intent of earning a 5% return, though Sage Hill is unaware of the rate implicit in the lease and has an incremental borrowing rate of 7%. 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.

A) What is the amount of the rental payments used in the lease agreement?

B) Prepare the entries for Cheyenne in 2017. Cheyenne uses straight-line depreciation?

C) How would Cheyenne’s accounting in part (a) change if it incurred legal fees of $700 to execute the lease documents and $700 in advertising expenses for the year in connection with the lease?