Rauch Incorporated leases a piece of equipment to Donahue Corporation on January 1, 2020. The lease agreement called for annual rental payments of $4,892 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 $25,000, a book value of $20,000, and both parties expect a residual value of $8,250 at the end of the lease term, though this amount is not guaranteed. Rauch set the lease payments with the intent of earning a 5% return, and Donahue 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.

Prepare the journal entries for Donahue for 2020 and 2021.

DATE	ACCOUNT TITLES AND EXPLANATION	DEBIT	CREDIT
1/1/20	RIGHT OF USE ASSET	18,214
	LEASE LIABILITY		18,214
	(To record the lease)
1/1/20	LEASE LIABILITY	4,892
	CASH		4,892
	(To record lease payment)
12/31/20	LEASE EXPENSE	4,892
	RIGHT OF USE ASSET		?
	LEASE LIABILITY		?
?	?	?
	?		?
?	?	?
	LEASE LIABILITY		?
	?		?

Suppose Donahue incurs initial direct costs of $750 related to the lease. Prepare the journal entries for 2020.

DATE	ACCOUNT TITLES AND EXPLANATION	DEBIT	CREDIT
1/1/20	RIGHT OF USE ASSET	18,964
	CASH		750
	LEASE LIABILITY		18,214
	(To record the lease)
1/1/20	LEASE LIABILITY	4,892
	CASH		4,892
12/31/20	LEASE EXPENSE	?
	LEASE LIABILITY		?
	RIGHT OF USE ASSET		?