Plash Photo Company leased a digital reproduction machine on January 1. The following information was obtained from the lease contract:
• The lease is non- cancellable and carries a term of five years. There is no renewal option and there is no transfer of ownership.
• The minimum rental payments of $ 120,000 per year are due each January 1 with the first one due at lease inception.
• The fair value of the equipment on the date the lease is signed is $ 600,000. The equipment has an economic life of eight years. The lessor paid fair value to acquire the asset.
• There is a guaranteed residual value of $ 10,000.
• Plash Photo depreciates similar machinery it owns on the straight- line basis.
• The lessee pays $ 3,250 in executory costs at the end of the year. Executory costs are debited to general and administrative expenses.
• Plash Photo’s incremental borrowing rate is 5% per year. The lessor’s 5% implicit rate is known to the lessee.
• There are no material uncertainties as to collection of the lease payments or future costs to be incurred under the lease.
Required
a. Classify the lease for both the lessor and the lessee.
b. Prepare the amortization table for the full term of the lease for Plash Photo.
c. Prepare the journal entries for Plash Photo for the first year of the lease (i. e., January 1 and December 31).