P$18-3.$ Classification as Finance, Sales$-$Type, or Operating Lease, Lessee, Lessor, Journal Entries, Unguaran. teed Residual Value.

Florida Energy Restoration, Ltd$.($FER$)$ enters into a lease agreement on January $1,2018,$ to lease standard power generators from R&R Electric, Inc. The terms of the lease follow.

The term of the lease is $7$ years with no renewal option. The seven annual lease payments of $$300,000$ will be made on January $1$ of each year.

The fair value of the equipment at January $1,2018,$ is $$1,700,479.$ The equipment has an economic life of $10$ years with no salvage value expected at that time. The cost of the equipment to the lessor, $R$&$R,$ is $$1,500,000,$

FER depreciates similar equipment that it owns on a straight$-$line basis over the economic life of the property.

FER's incremental borrowing rate is $10\%,$ and the lessor's $9\%$ implicit rate on the lease is known to FER.

There are no nonlease components related to this lease.

Neither party to the lease pays initial direct costs.

The lessor indicates that the collection of the lease payments are reasonably certain.

There is no guaranteed residual value in the lease contract; however, the lessor, $R$&$R,$ expects the asset to be worth $$100,000$ at the end of the lease term.

Required"

a$.$ Provide justification for classifying this as a finance lease for the lessee.

b$.$ Prepare a partial amortization table for $2018$ through $2020$ for the lessee using the effective interest rate methor of amortization.

c$.$ Prepare all of FER's journal entries for $2018$ and $2019.$

d$.$ Prepare the journa! entries required for $2018$ and $2019$ for FER if this were an operating lease. Hint: To record amounts that would be shown as "interest expense" on the amortization schedule, use the account name "Accrued Lease Payable"

e$.$ What type of lease is this for the lessor? Justify your answer.