On January 1, the Robinson Sales Company entered into a lease agreement to lease a piece of machinery for a period of five years from Smokey Boy Equipment (SBE). The machine is specialized for Robinson’s business needs, has a sales price of $ 60,000, and its useful life is seven years with no guaranteed residual value. The $ 11,198 annual rentals are due at the beginning of each year. The lease does not contain a transfer of ownership or a bargain purchase option. Assume that the lessor pays all executory costs. SBE’s 6% implicit rate is known to Robinson. The cost of the equipment to SBE is $ 60,000, its fair value. Assume there are no material uncertainties regard-ing future costs to be incurred under the lease and collectability is reasonably assured.
Required
a. Determine the lease classification for Robinson Sales.
b. Prepare the journal entries in the first year for Robinson Sales based on your answer to part a.