P21.3 (LO2) (Lessee Entries and Statement of Financial Position Presentation)Ludwick Steel SA,

as lessee, signed a lease agreement for equipment for 5 years, beginning December 31, 2019. Annual

rental payments of 40,000 are to be made at the beginning of each lease year (December 31). The

interest rate used by the lessor in setting the payment schedule is 6%; Ludwick's incremental

borrowing rate is 8%. Ludwick is unaware of the rate being used by the lessor. At the end of the lease,

Ludwick has the option to buy the equipment for 5,000, considerably below its estimated fair value at

that time. The equipment has an estimated useful lifeof 7 years, with no residual value. Ludwick uses

the straight-line method of depreciation on similar owned equipment.

Instructions

a.Prepare the journal entry or entries, with explanations, that Ludwick should record on December

31, 2019.

b.Prepare the journal entry or entries, with explanations, that Ludwick should record on December

31, 2020. (Prepare the lease amortization schedule for all five payments.)

c.Prepare the journal entry or entries, with explanations, that Ludwick should record on December

31, 2021.

d.What amounts would appear on Ludwick's December 31,2021, statement of financial position

relative to the lease arrangement?