Reference no: EM133170067

Question - Bridgeport Dairy leases its milking equipment from Indigo Finance Company under the following lease terms.

1. The lease term is 10 years, noncancelable, and requires equal rental payments of $32,500 due at the beginning of each year starting January 1, 2020.

2. The equipment has a fair value at the commencement of the lease (January 1, 2020) of $245,529 and a cost of $260,000 on Indigo Finance's books. It also has an estimated economic life of 15 years and an expected residual value of $14,000, though Bridgeport Dairy has guaranteed a residual value of $21,600 to Indigo Finance.

3. The lease contains no renewal options, and the equipment reverts to Indigo Finance upon termination of the lease. The equipment is not of a specialized use.

4. Bridgeport Dairy's incremental borrowing rate is 8% per year. The implicit rate is also 8%.

5. Bridgeport Dairy depreciates similar equipment that it owns on a straight-line basis.

6. Collectibility of the payments is probable.

Required - Prepare the journal entries for the lessee and lessor at January 1, 2020, and December 31, 2020 (the lessee's and lessor's year-end). Assume no reversing entries.