Using the information provided in BE18-4, prepare the journal entries for the lessor and the lessee at the inception of the lease.
In BE18-4
Iman Iron Works signed a lease on January 1 with Binks Bank for an iron- stamping machine. The lease has a 12-year term with no purchase option or transfer of ownership. Under the terms of the contract, Iman must pay $ 3,500 at the beginning of each year. Binks Bank’s implicit rate is 8%. The iron-stamping machine has an economic life of 25 years and a fair value of $ 35,000. If Iman borrowed at Binks Bank, the loan would have carried an interest rate of 10%. The lessee knows the implicit rate. Is this contract an operating or a capital lease for the lessee?