Blue Corporation enters into a 6-year lease of equipment on December 31, 2016, which requires 6 annual payments of $42,200 each, beginning December 31, 2016. In addition, Blue guarantees the lessor a residual value of $19,500 at the end of the lease. However, Blue believes it is probable that the expected residual value at the end of the lease term will be $9,500. The equipment has a useful life of 6 years. Assume that for Lost Ark Company, the lessor, collectibility of lease payments is probable and the carrying amount of the equipment is $160,000.
Prepare Lost Ark’s 2016 and 2017 journal entries, assuming the implicit rate of the lease is 10% and this is known to Blue