Cloud Corporation (Cloud) manufactures equipment with an estimated economic life of 15 years. On May 30, 2020, Cloud leases it to Gadget Corporation (Gadget) for a period of 10 years. Assume both companies follow ASPE. Details of the lease are as follows:

Equipment has a fair value and cost at the inception of the lease: $284,641.

Guaranteed residual value: $45876

Annual lease payment, due at beginning of each year: $30,400.

Lease contains no renewal options and the equipment reverts to Cloud at the end of the lease.

Gadgets incremental interest rate, as well as implicit rate is 10%.

Cloud has determined that collectibility of lease payments is reasonably predictable and that no additional costs will be incurred.

Instructions:

a. Prepare the journal entries for the lessee and lessor at May 30, 2020, and at December 31, 2020, which is the year end for both the lessee and lessor. (Round factor values to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g. 5,265.) (8 Marks)

b. Prepare journal entries at May 30, 2021 for the lessee and lessor. Assume reversing entries are not used. (Round factor values to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g. 5,675.) (4 Marks)