Problem:
Stevie Hightower leased a machine on December 31, 2013, for a three-year period. The lease agreement calls for annual payments in the amount of $17,000 on December 31 of each year beginning on December 31, 2013. Hightower has the option to purchase the machine on December 31, 2016, for $22,000 when its fair value is expected to be $32,000. The machine's estimated useful life is expected to be five years with no residual value. Hightower uses straight-line depreciation for this type of machinery. The appropriate interest rate for this lease is 10%.
Required:
Question 1: Calculate the amount to be recorded as a leased asset and the associated lease liability.
Question 2: Prepare Stevie Hightower's journal entries for this lease for 2013 and 2014.
Note: Please show how you came up with the solution.