Indigo Corporation enters into a 7-year lease of equipment on December 31, 2016, which requires 7 annual payments of $37,500 each, beginning December 31, 2016. In addition, Indigo guarantees the lessor a residual value of $18,700 at the end of the lease. However, Indigo believes it is probable that the expected residual value at the end of the lease term will be $8,700. The equipment has a useful life of 7 years. Prepare Indigos' December 31, 2016, journal entries assuming the implicit rate of the lease is 9% and this is known to Indigo.