Problem
Russell Corporation (lessee) leased a machine on December 31,2015, for a three- year period. The lease agreement calls for 3 annual payments in the amount of $16,000 on December 31 of each year beginning on December 31, 2016, one year from the signing of the lease.
Russell has the option to purchase the machine on December 31, 2018, for $20,000 when its fair value is expected to be $40,000.
The machine's estimated useful life if expected to be 5 years with no residual value. Russell uses straight line depresiation for this type of machinery.
The appropriate interest rate for this lease is 12%.
1. Calcuate the amount to be recorded a a leased asset and the associated leases liability.
2. Prepare Russell's journal entries for this lease for 2015 and 2016.