Flounder Corporation leased equipment to Shamrock, Inc. on January 1, 2020. The lease agreement called for annual rental payments of $1,276 at the beginning of each year of the 3-year lease. The equipment has an economic useful life of 7 years, a fair value of $7,600, a book value of $5,600, and Flounder expects a residual value of $5,100 at the end of the lease term. Flounder set the lease payments with the intent of earning a 8% return, though Shamrock is unaware of the rate implicit in the lease and has an incremental borrowing rate of 10%. There is no bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a specialized nature. What is the amount of the rental payments used in the lease agreement?
Prepare the entries for Flounder for 2020.
How would Flounder’s accounting in part a change if it incurred legal fees of $900 to execute the lease documents and $600 in advertising expenses for the year in connection with the lease?