The Timmer Company signs a lease agreement dated January 1, 2007 that provides for it to lease equipment from Landau Company beginning January 1, 2007. The lease terms, provisions, and related events are as follows:
The lease is non-cancelable and has a term of five years. The annual rentals are $83,222.92, payable at the end of each year, and provide Landau with a 12% annual rate of return on its net investment. The Timmer Company agrees to pay all executor costs at the end of each year. In 2007 these were: insurance $3,760; property taxes, $5,440. In 2008: insurance, $3,100; property taxes, $5,330. There is no renewal or bargain purchase option.
Timmer estimates that the equipment has an economic life of five years and a zero residual value. Timmer’s incremental borrowing rate is 16%, it knows the rate implicit in the lease, and it uses the straight-line method to record depreciation on similar equipment.
Required
1. Calculate the amount of the asset and liability of the Timmer Company at the inception of the lease. (Round to the nearest dollar.)
2. Prepare a table summarizing the lease payments and interest expense.
3. Prepare journal entries on the books of Timmer for 2007 and 2008.
4. Prepare a partial balance sheet in regard to the lease for Timmer for December 31, 2007.