Hugh Corporation leases a machine starting January 1, 20x1 from Smith Inc. The seven year lease requires annual payments of $875,000 at the beginning of each year. The economic life of the machine is ten years. The present value of the lease payments is $4,685,900. Smith Inc. purchased the machine for $5,500,000 and it has a fair value at the commencement of the lease of $6,000,000. The interest rate (known to both parties) is 10%. The residual value at the end of the lease is $1,000,000 and the residual value at the end of the economic life is $250,000. Use straight line depreciation.

Record the lessees entries for the years 20x1:

Record the lessors entries for the years 20x1: