Jenkins Manufacturing Company leased a piece of machinery for use in its operations from Perry Leasing on January 1. The 10-year, non-cancellable lease requires lease payments of $ 4,000 due at the beginning of each year. The machinery is estimated to have a 10- year life, is depreciated on the straight-line method, and will have no residual value at the end of the lease term. The present value of the minimum lease payments using 11.2% and the asset’s fair value on the date the lease is signed are both equal to $ 25,977. Perry paid fair value to acquire the equipment. The lessor’s implicit rate of 11.2% is known to Jenkins. Perry has no material uncertainties as to future costs to be incurred and collectability is reasonably assured. Prepare Jenkins Manufacturing’s journal entries at the inception of the lease and at the end of the first year.
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