Oakland Inc. signs a contract with Ashton Ltd. on January 1, 2021 to lease equipment to Ashton. The following information relates to the agreement. The term of the non-cancellable lease is five years, with no renewal option. The equipment has an estimated economic life of seven years. The fair value of the equipment on January 1, 2021 is $500,000. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $100,000, which is not guaranteed. Ashton Limited assumes direct responsibility for all executory costs, which include the following annual amounts: $900 to Rocky Mountain Insurance Ltd. for insurance and $1,600 to James Township for property taxes. The agreement requires equal annual rental payments from Ashton to Oakland beginning on January 1, 2021. The lessee's incremental borrowing rate is 10%. The lessor's implicit rate is 8% and is not known to the lessee. Ashton Limited uses the straight-line depreciation method for all equipment Round all amounts to the nearest dollar.

Instructions

Show how the lease is reported in the income statement of 2021 and the balance sheet of December 31, 2021.