Lazy Boy leased equipment on 1/1/05, that could have been purchased for $60,000. The initial payment of $11,827, including executory costs of $2,000, was made on that date. 7 additional annual payments were to be made each january 1. The lessee and lessor agreed that the asset should be worth $5,000 at the end of the lease when it was returned, but the lessor did not require the lessee to guarantee that value. The lessee was aware of the lessor's implicit interest rate of 10%.

1. Prepare Journal enties on Jan 1, 2005.
2.Prepare the adjusting entries on Dec 31, 2005.