The following facts pertain to a noncancelable lease agreement between Faldo Leasing Company and Flounder Company, a lessee.

Inception date		January 1, 2017
Annual lease payment due at the beginning of each year, beginning with January 1, 2017		$135,758
Residual value of equipment at end of lease term, guaranteed by the lessee		$55,000
Lease term		6	years
Economic life of leased equipment		6	years
Fair value of asset at January 1, 2017		$653,000
Lessors implicit rate		12	%
Lessees incremental borrowing rate		12	%

The lessee assumes responsibility for all executory costs, which are expected to amount to $5,100 per year. The asset will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $55,000. The lessee uses the straight-line depreciation method for all equipment.

Date Account Titles and Explanation Debit Credit Jan. 1, 2017 Leased Equipment Lease Liability (To record the lease.) Lease Liability Cash (To record first lease payment.) During 2017 Prepaid Lease Executory Costs Cash Dec. 31, 2017 Interest Expense Interest Payable (To record interest.) Depreciation Expense Accumulated Depreciation-Equipment (To record depreciation.) Jan. 1, 2018 Interest Payable Interest Expense (To reverse the December 31 entry.) Interest Expense Lease Liability Cash (To record the second lease payment.) During 2018 Prepaid Lease Executory Costs Cash Dec. 31, 2018 Interest Expense Interest Payable (To record interest.) Depreciation Expense Accumulated Depreciation-Equipment (To record depreciation.)