Bombay Ltd. is expanding and needs more manufacturing equipment. The company has been offered a lease contract for equipment with a fair value of $260,000. The lease has a five-year term, with beginning-of-year payments. The lease is renewable for a further two years at the option of the lessee. Annual rent for the first term is $57,200, for the second, $23,000. The inception of the lease is 1 January, and payments are made each 1 January. Based on allocating the lease payment on relative stand-alone prices, the first term rental includes $5,200 for non-lease components of maintenance and insurance; the second term has been allocated $3,000 for the non-lease components. Lease payments are close to market lease rates for the first but for the second term the rates are significantly lower than the market. The machinery has an expected life of 10 years. Bombay has an incremental borrowing rate of 10%. Bombay has been told that the interest rate implicit in the lease is 8%. Title reverts back to the lessor at the end of the lease.

Required:
Assume that the lease was entered into on 1 January 20X2. Bombay has a 31 December fiscal yearend. Prepare journal entries for the lease for 20X2, including any entries relating to the asset.