Mr. Kay Food Mart Inc., as lessee, enters into a lease agreement on July 1, 2021, to lease nonspecialized mobile refrigeration equipment from Pollet Products. The cost of the equipment to Pollet is $180,000. The following information is relevant to the lease agreement.

• The term of the lease is 5 years with no renewal options and there is no transfer of title. Payments of $44,880 are due beginning on July 1, 2021, and every July 1 thereafter.

• The fair value of the equipment at July 1, 2021, is $196,898. The equipment has an economic life of 5 years with no residual value.

• Mr. Kay Food Mart depreciates similar equipment that it owns on the straight-line basis over the economic life of the property.

• Mr. Kay Food Mart’s incremental borrowing rate is 8%, and the lessor’s implicit rate in the lease is not known.

• There are no nonlease components related to this lease.

• Collectability of all lease payments is reasonably assured.

Required

a. Determine the type of lease that Mr. Kay Food Mart, the lessee, should record on its books.

b. Prepare all journal entries necessary on the books of Mr. Kay Food Mart for 2021 and 2022. Mr. Kay’s year-end is December 31.

c. How should Pollet Products classify this lease contract?