Grady Leasing Company signs an agreement on January 1, 2012, to lease equipment to Azure Company. The following information relates to this agreement.

1. The term of the noncancelable lease is 5 years with no renewal option. The equipment has an estimated economic life of 5 years.
2. The fair value of the asset at January 1, 2012, is $93,600.00.
3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $7,490, none of which is guaranteed.
4. Azure Company assumes direct responsibility for all executory costs, which include the following annual amounts: (1) $948.00 to Frontier Insurance Company for insurance and (2) $1,692.00 to Crawford County for property taxes.
5. The agreement requires equal annual rental payments of $20,928.75 to the lessor, beginning on January 1, 2012.
6. The lessee's incremental borrowing rate is 12%. The lessor's implicit rate is 9% and is known to the lessee.
7. Azure Company uses the straight-line depreciation method for all equipment.
8. Axure uses reversing entries when appropriate.