On January $2,2024,$ Intermediate, Inc. signed a four$-$year lease contract with Baker Corporation to lease manufacturing equipment to aid in the expansion of Ai Widget production. Projections suggest that the Ai Widget will have a long life and provide substantial revenue for Intermediate, Inc.

Required payments are $$500,000$ per year, with the first payment being due on January $2,2024,$ and the remaining on December $31,2024,$ December $31,2025,$ and December $31,2026.$ The lessor designed the lease with a $12\%$ implicit interest rate in mind, but there is nothing in the lease to let the lessee know lessee know that rate. The marginal borrowing rate for the lessee is $10\%.$

The equipment is expected to last seven years and reverts to the lessor at the end of the lease. The lease gives the lessee a lucrative incentive to extend the lease two years after the end of the four$-$year lease term. The Lessor paid $$2,000,000$ to have the machine built.

a$.$ What kind of lease is this for the lessee? Explain why.

b$.$ What kind of lease is this for the lessor? Explain why.

c$.$ Determine the present value of the lease payments for both the lessor and lessee. $($Be careful about the interest rates. Neither knows the other's data$)$

d$.$ Complete an amortization table for the lessee and one for the lessor.

e$.$ Prepare journal entries for the lessee and lessor for the life of the lease.