Regina Corporation, which uses private enterprise GAAP, manufactures replicators. On May 29, 2011, it leased to Barnes Limited a replicator that cost $265,000 to manufacture and usually sells for $410,000. The lease agreement covers the replicator’s five-year useful life and requires five equal annual rentals of $95,930 each, beginning May 29, 2011. The equipment reverts to Regina at the end of the lease, at which time it is expected that the replicator will have a residual value of $40,000, which has been guaranteed by Barnes, the lessee. An interest rate of 12% is implicit in the lease agreement. Collectibility of the rentals is reasonably assured, and there are no important uncertainties concerning costs.
Prepare Regina’s May 29, 2011 journal entries.