Novak Corporation leases equipment from Falls Company on January 1, 2020. The lease agreement does not transfer ownership, contain a bargain purchase option, and is not a specialized asset. It covers 3 years of the equipment’s 8-year useful life, and the present value of the lease payments is less than 90% of the fair value of the asset leased. The annual lease payment is $36,000 at the beginning of each year, and Sarasota’s incremental borrowing rate is 9%, which is the same as the lessor’s implicit rate Required:
Prepare Novak’s journal entries on January 1, 2020, and December 31, 2020. Assume the annual lease payment is $39,000 at the beginning of each year, and Novak’s incremental borrowing rate is 5%, which is the same as the lessor’s implicit rate.