On January 1, 2010, Carey, Inc., entered into a noncancellable lease agreement, agreeing to pay $5,857 at the end of each year for 2 years to acquire a new computer system having a market value of $9,900. The expected useful life of the computer system is also 2 years, and the computer will be depreciated on a straight-line basis with no salvage value. The interest rate used by the lessor to determine the annual payments was 12%. Under the terms of the lease, Carey, Inc., has an option to purchase the computer for $1 on January 1, 2011.
Record the journal entry that Carey, Inc., should make on December 31, 2010, to record the first annual lease payment of $5,857. (Hint: Based on your answer to part b, determine the appropriate amounts for interest and principal.) (Round your answers to the nearest dollar amount. Omit the ""$"" sign in your response.)
This solution illustrates the journal entry required for the first payment on a capitalized lease.