On January 1, 2017, Sandhill Ltd. entered into an agreement to lease a truck from Vaughn Ltd. Sandhill follows IFRS 16 and Vaughn Ltd. follows IAS 17. The details of the agreement are as follows:

Carrying value of truck for Vaughn Ltd.$20,885Fair value of truck$20,885Economic life of truck5 yearsLease term3 yearsRental payments (at beginning of each month)$630Executory costs included in rental payments each month for insurance$25Incremental borrowing rate for Sandhill Ltd.12%Sandhill Ltd. expects to pay Vaughn Ltd. $3,560 under a residual value guarantee for the truck.

Additional information:

1.There are no abnormal risks associated with the collection of lease payments from Sandhill.2.There are no additional unreimbursable costs to be incurred by Vaughn in connection with the leased truck.3.At the end of the lease term, Vaughn sold the truck to a third party for $3,265, which was the truck's fair value at December 31, 2019. Sandhill paid Vaughn the difference between the guaranteed residual value of $3,560 and the proceeds obtained on the resale.4.Sandhill knows the interest rate that is implicit in the lease.5.Sandhill knows the amount of executory costs included in the minimum lease payments.6.Sandhill uses straight-line depreciation for its trucks with the residual value guarantee of $3,560 for the leased truck.

(a)

Prepare the journal entries that Vaughn would make on January 1, 2017 and the adjusting journal entries at December 31, 2017, to record the annual interest income from the lease arrangement, assuming that Vaughn has a December 31 fiscal year end.