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On January 1, 2021, Burrito Bill's leased restaurant equipment from Oval Corporation under a nine-year lease agreement. The lease agreement specifies annual payments of $75,000 beginning January 1, 2021, the beginning of the lease, and at each December 31 thereafter through 2028. The equipment was acquired recently by Oval at a cost of $540,000 (its fair value) and was expected to have a useful life of 13 years with no salvage value at the end of its life. (Because the lease term is only 9 years, the asset does have an expected residual value at the end of the lease term of $150,000.) Oval seeks a 10% return on its lease investments. By this arrangement, the lease is deemed to be an operating lease.
Required:
Question (a) What will be the effect of the lease on Burrito Bill's earnings for the first year? Show the separate components as well as the total amount. (ignore taxes)
Question (b) What journal entries will the lessee record during 2021 relating to this lease?
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