Using the information in E18-7 and assuming that the implicit rate for the­lessor is 7%, prepare the journal entries for 2016 and 2017 for Pollet Products. Pollet Products’ year end is December 31.
In E18-7
Mr. Kay Food Mart Incorporated, as lessee, enters into a lease agreement on July 1, 2016, to lease mobile refrigeration equipment from Pollet Products. The cost of the equipment to Pollet is $ 180,000. The following information is relevant to the lease agreement.
• The term of the non- cancellable lease is five years with no renewal options and there is no transfer of title. Payments of $ 44,880 are due beginning on July 1, 2016.
• The fair value of the equipment at July 1, 2016, is $ 196,898. The equipment has an economic life of five years with no residual value.
• Mr. Kay Food Mart depreciates similar equipment it owns on the straight- line basis over the economic life of the property.
• Mr. Kay Food Mart’s incremental borrowing rate is 8% and the lessor’s implicit rate in the lease is not known to Mr. Kay Food Mart.
• There are no executory costs related to this lease.
• There are no material uncertainties as to future costs and collectability is reasonably assured.