Bidwell Leasing purchased a single-engine plane for $540,000 andleased it to Red Baron Flying Club for its fair value of $742,586on January 1, 2018. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVADof $1 and PVAD of $1) (Use appropriate factor(s) from thetables provided.)

Terms of the lease agreement and related facts were:

Eight annual payments of $130,000 beginning January 1, 2018, theinception of the lease, and at each December 31 through 2024.Bidwell Leasing’s implicit interest rate was 11%. The estimateduseful life of the plane is eight years. Payments were calculatedas follows:

Amount to berecovered (fair value)	$	742,586
Lease payments at the beginningof each of the next eight years: ($540,000 ÷ 5.7122*)	$	130,000

* Present value of an annuity due of $1: n = 8, i =11%

Red Baron’s incremental borrowing rate is 12%.

Costs of negotiating and consummating the completed leasetransaction incurred by Bidwell Leasing were $15,622.

Required:
1. How should this lease be classified (a) byBidwell Leasing (the lessor) and (b) by Red Baron (thelessee)?
2. Prepare the appropriate entries for both RedBaron Flying Club and Bidwell Leasing on January 1, 2018.
3. Prepare an amortization schedule that describesthe pattern of interest expense over the lease term for Red BaronFlying Club.
4. Prepare the appropriate entries for both RedBaron and Bidwell Leasing on December 31, 2018 (the second leasepayment). Both companies use straight-line depreciation.
5. Prepare the appropriate entries for both RedBaron and Bidwell Leasing on December 31, 2024 (the final leasepayment).