Seal Container Corporation (SCC) signed a lease agreement on January 1, 2021, to lease new forklift equipment. The terms of the lease follow.

• The lease has a term of 10 years. There are no purchase or renewal options.

• SCC makes the annual lease payments of $70,000 on January 1 of each year, beginning on January 1, 2021.

• The fair value of the equipment at the commencement of the lease is $567,548.

• The equipment has an economic life of 15 years.

• The lease terms do not include a guaranteed residual value clause.

• The cost of the equipment to the lessor, Cirella Manufacturing Company, is $500,000.

• SCC depreciates the forklifts that it currently owns on a straight-line basis over the economic life of the property.
• SCC’s incremental borrowing rate is 5%, and the lessor’s implicit rate in the lease is not known to SCC.

• The lessee paid $7,452 in initial direct costs related to this lease on the lease commencement date.

• The lessor is reasonably certain as to collection of the lease payments.

Required

a. Classify this lease as operating or finance for the lessee.

b. Prepare an amortization table for the lessee from 2021 through 2023 using the effective interest rate method of amortization.

c. Prepare all of SCC’s journal entries for the first full year of the lease.

d. Prepare the journal entries and the lease amortization schedule required for SCC in the first year of the lease if it classifies the lease as an operating lease.