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Pharoah Company leases a building to Walsh, Inc. on January 1, 2017. The following facts pertain to the lease agreement.
| 1. | | The lease term is 5 years, with equal annual rental payments of $3,587 at the beginning of each year. |
| 2. | | Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature. |
| 3. | | The building has a fair value of $16,800, a book value to Pharoah of $9,800, and a useful life of 6 years. |
| 4. | | At the end of the lease term, Pharoah and Walsh expect there to be an unguaranteed residual value of $2,450. |
| 5. | | Pharoah wants to earn a return of 9% on the lease, and collectibility of the payments is probable. This rate is known by Walsh. |
Using the original facts of the lease, show the journal entries to be made by both Pharoah and Walsh in 2017.
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