Nagy Corp., an equipment dealer leased equipment to Pace Industries on May 1, 2021.  The fair value of the equipment was $370,000 (cost $275,000) and Nagy requires 7 equal annual payments of $64,000 starting on May 1, 2021.  Also, Nagy structured the lease with an implicit return that is known to Pace. The equipment is expected to have a useful life of 7 years with no residual value.  There are no provisions for a purchase option.  The equipment will not be returned to Nagy at the end of the lease.

Both firms’ financial reporting periods end of December 31.  The following lease amortization schedule – suitable for both parties – has been prepared:

	Payment	Interest	Lease Rec./ Liabil. Reduction	Lease Liabil./Rec. Remaining
				$   342,737
5/1/2021	$        64,000	$           -	$      64,000	278,737
5/1/2022	64,000	27,874	36,126	242,610
5/1/2023	64,000	24,261	39,739	202,871
5/1/2024	64,000	20,287	43,713	159,159
5/1/2025	64,000	15,916	48,084	111,074
5/1/2026	64,000	11,107	52,893	58,182
5/1/2027	64,000	5,818	58,182	0
	$      448,000	$ 105,263	$    342,737

Instructions

1. Prepare the journal entries for Nagy at May 1, 2021 and December 31, 2021 assuming that no interim adjusting entries are recorded.

2. Assume that Pace also paid $30,000 of initial direct lease costs upon signing the lease. Prepare the journal entries for Pace at May 1, 2021 and December 31, 2021 assuming that no interim adjusting entries are recorded.