Pronghorn Incorporated leases a piece of equipment to Larkspur Corporation on January 1, 2020. The lease agreement called for annual rental payments of $5.278 at the beginning of each year of the 4-year lease. The equipment has an economic useful life of 6 years, a fair value of $26,000, a book value of $21,000, and both parties expect a residual value of $8,350 at the end of the lease term though this amount is not guaranteed. Pronghorn set the lease payments with the intent of earning a 6% return, and Larkspur is aware of this rate. There is no bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a specialized nature. Click here to view factor tables. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Your answer is correct. Determine the nature of the lease to both Pronghorn and Larkspur. The lease is a/an operating lease to Pronghorn. The lease is a/an operating lease to Larkspur. LARKSPUR CORPORATION Lease Amortization Schedule Annuity-Due Basis Annual Payment Interest on Liability 5278 0 Reduction of Lease Liability 0 5278 Lease Liability 1938 1410 5278 846 4432 967 5278 581 4697 497 5278 299 4979 Lease Expense (Straight-Line) 0 20 5278 Lease Expense Schedule Interest on Lease Liability 0 846 Amortization of ROU Asset Carrying Value of ROU Asset 4432 0 1938 1495 21 5278 581 4697 1025 22 5278 299 4979 527 23 5278 0 5278 Date Account Titles and Explanation Debit 1/1/20 1/1/201 Right-of-Use Asset Lease Liability (To record the lease) Lease Liability 12/31/20 Cash (To record lease payment) Lease Expense Lease Liability 19386 5278 5278 Credit 193 52 1/31/20 Lease Expense 1/21 Lease Liability Right-of-Use Asset Lease Liability Cash 9/31/21 Lease Expense Lease Liability Right-of-Use Asset 5278 5278 5278 846 4432 5278 581 4697 Your answer is partially correct. Suppose Larkspur incurs initial direct costs of $700 related to the lease. Prepare the journal entries for 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Record journal entries in the order presented in the problem.) late Account Titles and Explanation 20 Right-of-Use Asset Cash Debit 20086 Credit 700 20 Cash Lease Liability (To record the lease) Lease Liability 31/20 Cash (To record lease payment) Lease Expense Lease Liability Right-of-Use Asset 5278 0.97/1 E 700 19386 5278 4432