On January 1, 2018, Maywood Hydraulics leased drilling equipment from Aqua Leasing for a three-year period ending December 31, 2018, at which time possession of the leased asset will revert back to Aqua. The equipment cost Aqua $423,414 and has an expected economic life of four years. Aqua expects the residual value at December 31, 2018, to be $60,000. Negotiations led to Maywood guaranteeing a $85,000 residual value.

Equal payments under the lease are $120,000 and are due on December 31 of each year with the first payment being made on December 31, 2018. Maywood is aware that Aqua used a 7% interest rate when calculating lease payments.

1.Prepare the appropriate entries for Maywood on January 1, 2018 and December 31, 2018, related to the lease.