Canadian Leasing Company leased a piece of machinery to Ornamental Concrete Limited, with the following terms:

- The lease is for five years; Ornamental cannot cancel the lease during this period.

- The lease payment is \(\$ 79,600\). Included in this is \(\$ 7,900\) in estimated insurance costs.

- At the end of the five-year initial lease term, Ornamental can elect to renew the lease for one additional five-year term at a price of \(\$ 29,500\), including \(\$ 2,500\) of estimated insurance costs. Market rentals are approximately twice as expensive.

- At the end of the first or second lease term, the leased asset reverts back to the lessor.

- Lease payments are due at the beginning of each lease year.

OTHER INFORMATION:

- Ornamental could borrow money to buy this asset at an interest rate of \(8 \%\).

- The equipment has a fair market value of \(\$ 430,000\) at the beginning of the lease term, and a useful life of approximately 12 years.

- The lease term corresponds to the fiscal year.

- Ornamental uses straight-line depreciation for all capital assets.

Required:

1. For this lease, provide the:

a. Lease term.

b. Guaranteed residual value.

c. Unguaranteed residual value.

d. Bargain purchase option.

e. Bargain renewal terms.

f. Minimum net lease payment.

g. Incremental borrowing rate.

If these amounts do not exist in the above lease, enter "none" as your response. State any assumptions.

2. Is this lease an operating lease or a finance lease for the lessee? Why?
3. Prepare journal entries for the first year of the lease on Ornamental's books.