On January 1, 2017, the Kane Kite Company leased a new fabric-cutting machine from Stewart Standard, Inc. Under the terms of the lease, Kane Kite must pay $ 200,000 at the beginning of each year, beginning on January 1, 2017, over a nine- year term. The lease terms do not contain a transfer of ownership and there is no bargain purchase option. There is also no residual value specified in the contract. The cutting machine has a useful life of nine years and Kane Kite depreciates similar equipment owned using the straight- line method. Kane Kite’s incremental borrowing rate is 9% and the 8% implicit rate in the lease is known to Kane Kite. The machine cost Stewart Standard $ 1,300,000 to manufacture and it has a selling price of $ 1,349,328. Stewart has no uncertainties as to future costs to be incurred and collection of the annual lease payment. Kane is required to pay $ 5,600 at the end of each year for maintenance and taxes, which it records as general and administrative expenses.
Required
a. What type of lease is this for both the lessee and lessor?
b. Prepare the lease amortization table for the lease term.
c. Prepare the journal entries necessary for Stewart Standard on January 1, 2017, and on December 31, 2017.
d. Prepare the journal entries necessary for Kane Kite Company on January 1, 2017, and on December 31, 2017.