Python Company leased equipment from Hope Leasing on January 1, 2006. Hope purchased the equipment at a cost of $222,666.
Other information:
Lease term 3 years
Annual payments $80,000 on January 1 each year starting in 2006
Life of asset 3 years
Fair value of asset $222,666
Implicit interest rate 8%
Incremental rate 8%
There is no expected residual value.
Required:
Prepare appropriate journal entries for Python for 2006 and 2007. Assume straight-line depreciation and a December 31 year-end.
Also, calculate the carrying value of the lease payable at December 31, 2007.