Indiana Jones Corporation enters into a 6-year lease of equipment on December 31, 2016, which requires 6 annual payments of $40,000 each, beginning December 31, 2016. In addition, Indiana Jones guarantees the lessor a residual value of $20,000 at the end of the lease. However, Indiana Jones believes it is probable that the expected residual value at the end of the lease term will be $10,000. The equipment has a useful life of 6 years. Assume that for Lost Ark Company, the lessor, collectibility of lease payments is probable and the carrying amount of the equipment is $180,000.
Prepare Lost Arks 2016 and 2017 journal entries, assuming the implicit rate of the lease is 6% and this is known to Indiana Jones. (Credit account titles are automatically indented when amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places e.g. 5,275.)
Click here to view the factor table. Date Account Titles and Explanation Debit Credit December 31, 2016 (To record the lease) December 31, 2016