On January 1, 2013, Allied Industries leased a high-performance conveyer to Karrier Company for a four-year period ending December 31, 2016, at which time possession of the leased asset will revert back to Allied. The equipment cost Allied $966,000 and has an expected useful life of six years. Allied expects the residual value at December 31, 2016, will be $300,000. Negotiations led to the lessee guaranteeing a $340,000 residual value.
Equal payments under the lease are $200,000 and are due on December 31 of each year with the first payment being made on December 31, 2013. Karrier is aware that Allied used a 5% interest rate when calculating lease payments.
1. Show the appropriate entries for both Karrier and Allied on January 1, 2013, to record the lease.
2. Show all appropriate entries for both Karrier and Allied on December 31, 2013, related to the lease and the leased asset.