Smart Corporation

Smart Corporation is a 90%-owned subsidiary of Phan Inc. On January 2, 20X6, Smart agreed to lease $400,000 of construction equipment from Phan for $3,000 a month on an operating lease. The equipment has a 10-year life and is being depreciated using the straight-line method.
Phan Inc. and Smart Corp. Trial Balance For the Year Ended December 31, 20X8

Phan Smart

Equipment 987,000 40,000
Accumulated Depr – Equipment (212,500) (8,000)
Equipment Under Operating Lease 400,000
Accumulated Depr – Operating Lease (120,000)
Rent Receivable 3,000
Rent Payable (3,000)
Rental Income 50,000
Rent Expense 36,000
Depreciation Expense 138,700 2,000

Required: Prepare the eliminations and adjustments required by the intercompany lease. Key and explain all eliminations and adjustments