Lai Corporation, which uses private enterprise GAAP, leased equipment that was carried at a cost of $175,000 to Swander Inc., the lessee. The term of the lease is five years, beginning January 1, 2011, with equal rental payments of $40,584 at the beginning of each year. Swander pays all executory costs directly to third parties. The equipment’s fair value at the lease’s inception is $175,000. The equipment has a useful life of six years with no residual value.
The lease has an implicit interest rate of 8%, no bargain purchase option, and no transfer of title. Collectibility is reasonably assured, with no additional costs to be incurred by Lai. Prepare Lai Corporation’s January 1, 2011 journal entries at the inception of the lease.