On January 3, 2020, Hanna Corporation signed a lease on a machine for its manufacturing operation and the lease commences on the same date. The lease requires Hanna to make six annual lease payments of $12,000 with the first payment due December 31, 2020. Hanna could have financed the machine by borrowing the purchase price at an interest rate of7%.

a. Prepare the journal entries that Hanna Corporation would make on January 3 and December 31, 2020, to record this lease assuming

i. the lease is reported as an operating lease.

ii. the lease is reported as a finance lease.

b. Post the journal entries of part a to the appropriate T-accounts.

c. Show how the entries posted in part b would affect the financial statements using the financial statement effects template.

d. Explain how the financial statement effects differ between the two treatments.