On January 1, 2019, Holt National Bank (HNB) acquired a fleet of trucks to be leased to J Rivers Company. HNB paid $105,000 to acquire the vehicles. which is also the fair value of the fleet. The lease terms follow.

• Annual rental payments of $36.272 are due on January 1 of each year.

• Lease term is 3 years.

• There is no residual value and no purchase option.

• The economic life of the asset is 3 years.

• The lessee·s incremental borrowing rate is 5%: the lessor"s implicit rate is not known to J Rivers Company. 

• Included in the rental payments arc annual sales taxes and maintenance. Annual sales taxes equal $500 paid to the lessor on January 1 of the year and represent a lease component. Annual maintenance is $800 and is paid to the lessor at the beginning of the year. The maintenance is a nonlease component, and the lessee elected not to allocate the consideration to the lease and nonlease components due to immateriality. The lessee has elected to account for each separate lease and nonlease cornerstone as a single component.

• HNB has no material uncertainties regarding future costs to be incurred under the lease. and collect ability is reasonably assured. J Rivers depreciates similar vehicles that it owns using the straight-line method.

Required

a. Classify the lease as either a finance lease or an operating lease for J Rivers Company, the lessee.

b. Prepare the journal entries for the first year of the lease for J Rivers Company. the lessee