Aldridge Enterprises has a long standing policy of acquiring company equipment by leasing. Early in 2011, the company entered into a lease for a new milling machine. The lease stipulates that annual payment will be made for five years. The payments are to be made in advance on December 31 of each year. At the end of the 5 year period, Aldridge may purchase the machine. Company financial records show the incremental borrowing rate to be less than the implicit interest rate. The estimated economic life of the equipment is 12 years. Aldridge uses the calender year fo reporting purposes and straight line depreciation for other equipment. In addition, the follow information about the lease is also available.
1.)annual lease payment-$55,000
2.)purchase option price-$25,000
3.)Estimated fair value of machine after 5 years-$75,000
4.)Incremental Borrowing Rate-10%
5.)Date of first lease payment-Jan 1, 2011. Instructions: Give the Journal entries that would be made on Aldridge's books for the first two years of the lease.