Larkspur Steel Company, as lessee, signed a lease agreement for equipment for $5$ years, beginning December $31,$

Annual rental payments of $$42,000$ are to be made at the beginning of each lease year $($December $31).$ The

interest rate used by the lessor in setting the payment schedule is $4\%$; Larkspur's incremental borrowing rate is $6\%.$

Larkspur is unaware of the rate being used by the lessor. AT the end of the lease, Larkspur has the option to buy the

equipment for $$5,000,$ considerably below its estimated fair value at the time. The equipment has an estimated useful

life of $7$ years, with no salvage value. Larkspur uses the straight$-$line method of depreciation on similar owned

equipment.

Round present value factor calculations to $5$ decimal places and the final answer to $0$ decimal places.

$($a$)$ Prepare the journal entries, that Larkspur should record on December $31,2025.$

$($To record the first rental payment$)$

$($b$)$ Prepare the journal entries, that Larkspur should record on December $31,2026.$

$($d$)$ What amounts would appear on Larkspur's December $31,2027,$ balance sheet relative to the lease arrangement?

LARKSPUR STEEL COMPANY

Balance sheet $($Partial$)$

ASSETS

LIABILITIES