Question 1: HKU Leasing agrees to lease equipment to Minion Furniture on January 1, 20X1. The following information relates to the lease agreement.

1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 7 years.

2. The cost of the machinery is $700,000. The fair value of the asset on January 1, 20X1 is $700,000.

3. The lease contains a bargain purchase option of $60,000 exercisable at the end of lease term. At the end of the lease term, the asset reverts to the lessor and expected residual value is zero. Minion uses straight-line depreciation for all long-term assets.

4. HKUs implicit rate is 6%, and Minions incremental borrowing rate is 6%

5. The lease is a non-cancellable lease. First payment is made in advance and the remaining payment are made on Dec 31 each year.

Required:

1. Calculate the amount of the annual rental payment required.

2. Prepare journal entries to record the lease for HKU (lessor) for the year 20X1.

3. Prepare journal entries to record the rental payment for HKU (lessor) for the year 20X2.