Exhibit 2 On January 1, Year 1, Company ABC leases equipment from Nelson Company for an annual lease rental of $7,000. The lease term is seven years, and the lessor's interest rate implicit in the lease is 7%. The useful life of the equipment is five years, and its estimated residual value equals its removal cost. The fair value of leased equipment equals the present value of rentals. (Assume the lease is capitalized.) Question 4 (Exhibit 2) Prepare accounting entries required for Year 1 \& 2. Question 5 (Exhibit 2) Compute and illustrate the effect on the income statement for the year ended December 31. Year 1