Dr$.$ Frankenstein Inc. $($the lessor$)$ constructs laboratory equipment with an estimated life of $12$ years and leases it to Dr$.$ Jekyll Inc. $($the lessee$)$ for a period of $10$ years beginning on January $1$st$,2015.$ The normal selling price of this equipment is $$343,734$ and its value at the end of the lease term is estimated to be $$15,000.$ Jekyll agrees to make annual payments at the beginning of each year for the equipment. Jekyll also agrees to directly pay $$5,000$ in annual insurance costs $($paid at the end of each year$)$ and guarantees that the equipment will be worth at least $$10,000$ at the end of the lease. Frankenstein incurred costs of $$210,000$ to construct the equipment and $$14,000$ in negotiating and closing the lease. Frankenstein sets the annual payments based on the fair market value of the equipment and requires a $10\%$ return on the lease. Frankenstein has determined that collectability of the lease payments is reasonably assured and that no additional costs will be incurred. Both companies have December $31$st fiscal year ends and depreciate their assets using the straight$-$line method. Dr$.$ Jekyll has an $11\%$ borrowing rate, although it knows the implicit rate Frankenstein uses. The laboratory equipment has a fair market value of $$7,000$ at the end of the lease $($this is unknown at the inception of the lease$).$ The equipment$$s salvage value is $$2,000.$ This lease is noncancellable.

prepare all the lessors journal entries through $1/1/2016.$ Hint: include journal entries for any costs the lessor expenses related to the lease.

Answer rating: 100% (QA)

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