On January 1, 1999, Linda Lou Foods, Inc., leased a tractor. The lease agreement qualifies as a capital lease and calls for payments of $\$ 7,000$ per year (payable each year on January 1, starting in 2000) for eight years. The annual interest rate on the lease is 8 percent. Linda Lou Foods uses a calendar-year reporting period.

1. Prepare the journal entries for the following dates:

a. January 1, 1999, to record the leasing of the tractor.

b. December 31, 1999, to recognize the interest expense for the year 1999 .

c. January 1, 2000, to record the first lease payment.

2. Prepare the appropriate journal entries at December 31, 2000, and January 1, 2001.

3. Interpretive Question: Explain briefly how the leased asset is accounted for annually.