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Question - Sarasota Corporation leased equipment to Metlock, Inc. on January 1, 2020. The lease agreement called for annual rental payments of $893 at the beginning of each year of the 4-year lease. The equipment has an economic useful life of 8 years, a fair value of $8,500, a book value of $6,500, and Sarasota expects a residual value of $6,000 at the end of the lease term. Sarasota set the lease payments with the intent of earning a 4% return, though Metlock is unaware of the rate implicit in the lease and has an incremental borrowing rate of 6%. There is no bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a specialized nature.
Required -
1. What is the amount of the rental payments used in the lease agreement?
2. Prepare the entries for Sarasota for 2020.
3. How would Sarasota's accounting in part a change if it incurred legal fees of $600 to execute the lease documents and $400 in advertising expenses for the year in connection with the lease?
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