Oriole Corporation enters into a 5-year lease of equipment on December 31, 2019, which requires 5 annual payments of $36,200 each, beginning December 31, 2019. In addition, Oriole guarantees the lessor a residual value of $20,300 at the end of the lease. However, Oriole believes it is probable that the expected residual value at the end of the lease term will be $10,300. The equipment has a useful life of 5 years. Assume that for Lost Ark Company, the lessor, collectibility of lease payments is probable and the carrying amount of the equipment is $120,000. The equipment has a useful life of 6 years.
Required:
Prepare Oriole’s December 31, 2019, journal entries, assuming the implicit rate of the lease is 6% and this is known to Oriole.