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Question - Bridgeport Steel Company, as lessee, signed a lease agreement for equipment for 5 years, beginning December 31, 2020. Annual rental payments of $46,000 are to be made at the beginning of each lease year (December 31). The interest rate used by the lessor in setting the payment schedule is 7%; Bridgeport's incremental borrowing rate is 9%. Bridgeport is unaware of the rate being used by the lessor. At the end of the lease, Bridgeport has the option to buy the equipment for $5,000, considerably below its estimated fair value at that time. The equipment has an estimated useful life of 7 years, with no salvage value. Bridgeport uses the straight-line method of depreciation on similar owned equipment.
Required -
(a) Make the journal entries, that Bridgeport should record on December 31, 2020.
(b) Make the journal entries, that Bridgeport should record on December 31, 2021.
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