Chapter 15, Problem 15.21E

Lessee; variable lease payments

• LO15–2, LO15–6

On January 1, 2018, QuickStream Communications leased telephone equipment from Digium, Inc. Digium’s cash selling price for the equipment is $1,306,578. The lease agreement specifies six annual payments of $300,000 beginning December 31, 2018, and at each December 31 thereafter through 2023. The six-year lease is equal to the estimated useful life of the equipment. The contract specifies that lease payments for each year will increase by the higher of (a) the increase in the Consumer Price Index for the preceding year or (b) 3%. The CPI at the beginning of the lease is 120. Digium routinely leases equipment to other firms. The interest rate in these lease arrangements is 10%.

Required:

Prepare the appropriate journal entries for QuickStream to record the lease at its beginning date of January 1, 2018.