Monk Company, a dealer in machinery and equipment, leased equipment with a 10-year life to Leland Inc. on July 1, 20X1. The fair value of the leased equipment at July 1, 20X1, is $1,849,591. The lease is appropriately accounted for as a sale by Monk and as a purchase by Leland. The lease is for an 8-year period, expiring June 30, 20X9. The first of eight equal payments of $300,000 is due on June 30, 20X2. Leland has an option to purchase the equipment on June 30, 20X9, for $100,000 even though the expected residual value at that time is $600,000. Leland’s incremental borrowing rate is 7%, and it uses straight-line depreciation. The equipment is expected to have a salvage value of zero at the end of its 10-year life.
Required:
1. At what amount should Leland record the leased equipment on July 1, 20X1?
2. Prepare Leland’s amortization table for the leased equipment.
3. What are the amounts of amortization and interest expense that Leland should record for the year ended December 31, 20X1, and for the year ended December 31, 20X2?
