Problem 21-03 (Part Level Submission)

Pina Steel Company, as lessee, signed a lease agreement for equipment for 5 years, beginning December 31, 2020. Annual rental payments of $51,025 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%; Pina's incremental borrowing rate is 8%. Pina is unaware of the rate being used by the lessor. At the end of the lease, Pina 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 life of 7 years, with no salvage value. Pina uses the straight-line method of depreciation on similar owned equipment.

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(a)

Prepare the journal entries, that Pina should record on December 31, 2020.