Indiana Jones Corporation enters into a6-year lease of equipment on December 31, 2016, which requires 6 annual payments of $40,000each, beginning December 31, 2016. In addition, Indiana Jones guarantees the lessor a residual value of $20,000at the end of the lease. However, Indiana Jones believes it is probable that the expected residual value at the end of the lease term will be $10,000. The equipment has a useful life of 6 years. Assume that for Lost Ark Company, the lessor, collectibility of lease payments is probable and the carrying amount of the equipment is $180,000.

Prepare Lost Ark's 2016 and 2017 journal entries, assuming the implicit rate of the lease is 6% and this is known to Indiana Jones.

December 31, 2016

(To record the lease)

December 31, 2016

(To record receipt of lease payment)

December 31, 2017