Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease includes a guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessors implicit lease rate, known to the lessee, is 10%. The lessor and the lessee use ASC 842 guidelines for lease accounting.

Present value interest factors are:

	10%	12%
PV factor of $1 for 10 periods	0.38554	0.32197
PV factor for ordinary annuity for 10 periods	6.14457	5.65022

At the end of Year 1, Pepper will make a payment of $30,000. Which one of the following entries will properly record this payment? (Round intermediate and final answer to the nearest whole dollar amount.)

Multiple Choice

• DR Finance lease liability 25,000 DR Maintenance expense 5,000 CR Cash 30,000

• DR Finance lease liability 14,253 DR Interest expense 15,747 CR Cash 30,000

• DR Finance lease liability 30,000 CR Cash 30,000

• DR Finance lease liability 9,253 DR Maintenance expense 5,000 DR Interest expense 15,747 CR Cash 30,000