Question - Assume the on January 1, 2012, Flagstaff Corp. signs a 5 year noncancelable lease agreement to lease a vehicle from Sedona Off Road Company. The following information pertains to the lease agreement.
1. The agreement requires equal rental payment of 10,000 beginning on January 1, 2012.
2. The fair value of the vehicle is 41,000
3. The vehicle has an estimated economic life of 10 years, with a guaranteed residual value of 5,000. Flagstaff Corp. depreciates similar vehicle on the straight line method.
4. The lease is nonrenewable. At the termination of the lease, the vehicle reverts to the lessor.
5. Flagstaff's incremental borrowing rate is 10% per year. The lessor's implicit rate is not known by Flagstaff Corp.
6. The yearly rental payment includes 1,000 of executory costs related to taxes on the property.
Instructions: Prepare the journal entries on the lessee's books to reflect the signing of the lease agreement and to record the payments and expenses related to the lease for the years 2012 and 2013. Flagstaff's corporate year end is December 31.