Lessor's initial direct costs; direct financing lease
Response to the following problem:
Terms of a lease agreement and related facts were:
a. Costs of negotiating and consummating the completed lease transaction incurred by the lessor were $4,242.
b. The retail cash selling price of the leased asset was $500,000. Its useful life was three years with no residual value.
c. Collectibility of the lease payments by the lessor was reasonably predictable and there were no costs to the lessor that were yet to be incurred.
d. The lease term is three years and the lessor paid $500,000 to acquire the asset (direct financing lease).
e. Annual lease payments at the beginning of each year were $184,330.
f. Lessor's implicit rate when calculating annual rental payments was 11%.
Required:
1. Prepare the appropriate entries for the lessor to record the lease and related payments at its inception, January 1, 2016.
2. Calculate the effective rate of interest revenue after adjusting the net investment by initial direct costs.
3. Record any entry(s) necessary at December 31, 2016, the fiscal year-end.