Culver Corporation leased equipment to Splish Brothers, Inc. on January 1, 2017. The lease agreement called for annual rental payments of $1,135 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 $9,500, a book value of $7,500, and Culver expects a residual value of $7,000 at the end of the lease term. Culver set the lease payments with the intent of earning a 4% return, though Splish Brothers is unaware of the rate implicit in the lease and has an incremental borrowing rate of 6%. 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.

1. Prepare all necessary journal entries for Splish Brothers in 2017

a. 1/1/17 to record the lease:

b. 1/1/17 to record lease liability:

c. 12/31/17

How would the measurement of the lease liability and right-of-use asset be affected if, as a result of the lease contract, Splish Brothers was also required to pay $600 in commissions, prepay $800 in addition to the first rental payment, and pay $200 of insurance each year?

lease liability:

right of use of asset:

Suppose, instead of a 3-year lease term, Splish Brothers and Culver agree to a one-year lease with a payment of $1,135 at the start of the lease. Prepare necessary journal entry for Splish Brothers in 2017.

1/1/17: