Salsa Co. leased equipment to Chip Inc. on June 1, 2006. The lease is for a 9-year period ending May 31, 2015. The first of nine equal annual payments of $175,000 (excluding executory costs) was made on June 1, 2006. The cost of the equipment to Salsa is $870,000. The equipment has an estimated useful life of 10 years and Salsa Co. expects the equipment to have a residual value of $47,000, which is unguaranteed by Chip, Inc. The FMV of the equipment is $1,108,612. Both companies have fiscal year-ends of December 31, and the implied and incremental rates are both 10%.
Required:
1. Give the entry required to record the lease on Salsa's books.
2. How much interest revenue will Salsa recognize in 2006?