On January 1, YR01 Target Inc. entered into a lease agreement with REIT Inc. for the rental of warehouse space. The lease is for a 3 year period with rental payments made at the start of each year. The first rental payment is due on January 1, YR01. Annual rental payments increase 5 percent each year to compensate REIT Inc. for the effects of inflation. Under the lease contract the rental payments are: Jan1,YR01,$10,000

Jan1,YR02,$10,500; Jan1,YR03,$11,025;TOTAL=$ 31,525.

The amount of warehouse space made available to Target under this lease remains constant and

Target expects to fully utilize the space each year. Hence, the use benefit of this lease to Target

will be uniform over the lease period. The controller for Target Inc. has appropriately classified

this lease as an operating lease.

Question

How shall rental Expense (not the above mentioned payment, expense is different with payment)be computed each year?

What are journal entries for the full YR01 year?