Landlord Company and Tenant Company enter into a noncancelable, direct financing lease on January 1, 2016, for new heavy equipment that cost the Landlord $300,000 (useful life is 6 years with no residual value). The fair value is also $300,000. Landlord expects a 14% return over the 6-year period of the lease. Lease provisions require 6 equal annual amounts payable each January 1, beginning with January 1, 2016. Tenant pays all executory costs. The heavy equipment reverts to the lessor at the termination of the lease. Assume that there are no initial direct costs. The collectibility of the rentals is reasonably assured, and there are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor.

Required:

1. Next Level Show how Landlord should compute the annual rental amounts.

2. Next Level Prepare a table summarizing the lease and interest receipts that would be suitable for Landlord.

3. Assuming that the table prepared in Requirement 2 is suitable for both the lessee and the lessor, prepare the journal entries for both firms for the years 2016 and 2017. Use the straight-line depreciation method for the leased equipment. The executory costs paid by the lessee are in 2016: insurance, $700 and property taxes, $800; in 2017: insurance, $600 and property taxes, $750.

4. Next Level Show the items and amounts that would be reported on the comparative 2016 and 2017 income statements and ending balance sheets for both the lessor and the lessee. Include appropriate notes to the financial statements.