The controller for Riley's Knives. is concerned about certain business transactions that the company experienced during 2023. The controller, after discussing these matters with various individuals, has come to you as the CFO for advice. Riley's Knives follows ASPE. The transactions at issue are presented below:

The company has decided to switch from the direct write-off method for accounting for bad debts to the percentage-of-sales approach. Assume that Riley's Knives has recognized bad debt expense as the receivables have actually become uncollectible in the following way:

	2022	2023
From 2022 sales	10600	4000
From 2023 sales		15000

The controller estimates that an additional $21,800 in bad debts will be written off in 2024: $3,800 applicable to 2022 sales and $18,000 to 2023 sales.

Inventory has been shipped on consignment. These transactions have been recorded as ordinary sales and billed as such (on account). At December 31, 2023, inventory billed and in the hands of consignees amounted to $160,000. The percentage markup on selling price is 20%. Assume that the consigned inventory is sold the following year. The company uses the perpetual inventory system.

During 2023, Riley's Knives sold $300,000 worth of goods on the instalment basis. The cost of sales associated with these instalment sales is $225,000. The company inadvertently handled these sales and related costs as part of their regular sales transactions. Cash of $86,000, including a down payment of $30,000, was collected on these instalment sales during 2023. Due to questionable collectability, the instalment method was considered appropriate.

The CEO of Riley's Knives Corp. is reviewing the controller's work. She is unclear why the reported pre-tax income is now lower than it was prior to these adjustments. She asks you why this occurred and for of a comprehensive explanation regard how and when accounting changes are made. Provide her with this information.

In addition, on January 1, 2023, Riley's Knives leased equipment to Canary Town Inc. The lease is a 5-year non-cancellable lease with for equipment that has an estimated useful life of 5 years and a fair value of $2,000,000. Canary Town Inc. has an incremental borrowing rate of 8% and Riley's Knives implicit rate is 6%. Canary Town Inc. will make annual lease payments on January 1 of each year (with the first payment due at the beginning of the lease) based on the fair value of the equipment. The lease agreement includes a guarantee that Canary Town Inc. will take over ownership of the equipment from Riley's Knives for a final payment of $100,000.

You, as CFO, have determined that in order to recover the $2,000,000 investment, will need to charge $431,182 as the lease payment. Your Controller, who is a new CPA graduate, is asking how you determined that $431,181 was the correct lease payment amount to charge. In addition to helping him understand the financial component of the lease, also provide the journal entries to record the lease.