On 4 July 20X2, Giovanni Inc. leased computer equipment through the leasing subsidiary of Giovanni’s bank. The lease was for five years at $240,000 per year, payable at the beginning of each lease year. Giovanni recorded the initial lease payment as prepaid rent and amortized it to rent expense at the end of each month.
In April 20X4, the controller determined that the lease had been incorrectly reported as an operating lease; it should have been accounted for as a finance lease. The implicit interest rate in the lease was 6%.

Giovanni uses straight-line depreciation for equipment. The company’s income tax rate is 25%. The change relates to temporary differences and thus deferred tax is affected.

Required:
1. What effect will this correction have on the financial statements for 20X2 and 20X3?
Provide calculations. The lease liability may be stated in total on the SFP; it is not necessary to subdivide the liability into current and long-term portions.
2. Prepare the necessary journal entries to correct lease accounting as of 1 January 20X4.