On January 1, 2017, Teal Company contracts to lease equipment for 5 years, agreeing to make a payment of $164,292 at the beginning of each year, starting January 1, 2017. The leased equipment is to be capitalized at $674,000. The asset is to be amortized on a double-declining-balance basis, and the obligation is to be reduced on an effective-interest basis. Teals incremental borrowing rate is 6%, and the implicit rate in the lease is 11%, which is known by Teal. Title to the equipment transfers to Teal at the end of the lease. The asset has an estimated useful life of 5 years and no residual value.

a. Prepare the journal entries that Teal should record on January 1, 2017.

January 1, 2017

Dr.

Cr.

(To record the lease.)

Dr.

Cr.

(To record lease payment.)

b. Prepare the journal entries to record amortization of the leased asset and interest expense for the year 2017.

December 31, 2017

Dr.

Cr.

(To record amortization of the leased asset.)

Dr.

Cr.

c.Prepare the journal entry to record the lease payment of January 1, 2018, assuming reversing entries are not made.

January 1,2018

Dr.

Cr.

d. What amounts will appear on the lessees December 31, 2017, balance sheet relative to the lease contract?

e. How would the value of the lease liability in part (b) change if Teal also agreed to pay the fixed annual insurance on the equipment of $2,000 at the same time as the rental payments?