On January 1, 2016, Ballieu Company leases specialty equipment with an economic life of 8 years to Anderson Company. The lease contains the following terms and provisions:

The lease is noncancelable and has a term of 8 years.

The annual rentals are $34,500, payable at the beginning of each year.

The interest rate implicit in the lease is 11%.

Anderson agrees to pay all executory costs and is given an option to buy the equipment for $1 at the end of the lease term, December 31, 2024.

The cost of the equipment to the lessor is $137,000, and the fair retail value is approximately $197,100.

The lessor incurs no material 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.

The lessor estimates that the fair value is expected to be significantly greater than $1 at the end of the lease term. The lessor calculates that the present value on January 1, 2016 of 8 annual payments in advance of $34,500 discounted at 11% is $197,070.76 (the $1 purchase option is ignored as immaterial).

Required:

1. Next LevelIdentify the classification of the lease transaction from Ballieu's point of view.

2. Prepare all the journal entries for Ballieu for the years 2016 and 2017.

CHART OF ACCOUNTS

Ballieu Company

General Ledger

ASSETS

111 Cash

121 Accounts Receivable

122 Lease Receivable

141 Inventory

152 Prepaid Insurance

181 Equipment

198 Accumulated Depreciation

LIABILITIES

211 Accounts Payable

231 Salaries Payable

250 Unearned Interest

261 Income Taxes Payable

EQUITY

311 Common Stock

331 Retained Earnings

REVENUE

411 Sales Revenue

431 Interest Revenue: Leases

EXPENSES

500 Cost of Asset Leased

511 Insurance Expense

512 Utilities Expense

521 Salaries Expense

532 Bad Debt Expense

540 Interest Expense

541 Depreciation Expense

559 Miscellaneous Expenses

910 Income Tax Expense

Prepare all the journal entries for Ballieu for the years 2016 and 2017. Additional Instructions

GENERAL JOURNAL

DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT

1

2

3

4

5

6

7

8

9