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

If the equipment is worth $12,500 at the end of the lease, Pepper will make which one of the following journal entries?

Multiple Choice

• DR Finance lease liability 12,500 CR Right-to-use asset 12,500

• DR Finance lease liability 10,000 CR Right-to-use asset 10,000

• No entry required.