Preparing lessee’s journal entries for an operating lease and a capital lease. General Motors Corporation (GM) sells a luxury minivan for $25,000. FedUp Delivery Services agrees to lease a minivan for a monthly rental of $750 for three years. FedUp Delivery Services will return the minivan to GM at the end of the lease period. GM expects to lease the minivan to Rent-a-Wreck for the remaining two years of its useful life. The appropriate interest rate for a three-year collateralized loan for FedUp Delivery Services is 6%, compounded monthly. Assume that FedUp Delivery Services makes all rental payments at the end of each month.

a. Does this lease qualify as an operating lease or a capital lease? Explain.

b. Assume that this lease is an operating lease. Give the journal entries for FedUp Delivery Services at the time it signs the lease and at the end of the first two months of the lease period.

c. Repeat part b assuming that the lease is a capital lease. FedUp Delivery Services uses the straight-line depreciation method and records depreciation monthly.