On January 1, Holt National Bank (HNB) acquired a fleet of trucks to be leased to J Rivers Company. HNB paid $ 99,999 to acquire the vehicles, which is also the fair value of the fleet. The lease terms are listed below:
• Annual rental payments of $ 34,972 are due at the beginning of each year. These are the minimum (“pure”) rental payments and do not include any executory costs.
• Lease term is three years.
• There is no residual value and no bargain purchase option.
• The economic life of the asset is three years.
• The lessor’s 5% implicit rate is known to J Rivers Company.
• The lessee’s incremental borrowing rate is 6%.
• Annual maintenance is $ 800 and annual property tax is $ 500. The lessee pays both at the end of the year. HNB has no material uncertainties regarding future costs to be incurred under the lease and collectability is reasonably assured. J Rivers depreciates similar vehicles owned using the straight- line method.

Required
a. Classify the lease as either a capital lease or an operating lease for J Rivers Company, the lessee.
b. Prepare the journal entries for the first year of the lease for J Rivers Company, the lessee. .