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On January 1, Year 1, Lakeshore Gelato (Lessee) leases nonspecialized equipment for 5 years, agreeing...

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Accounting

On January 1, Year 1, Lakeshore Gelato (Lessee) leases nonspecialized equipment for 5 years, agreeing to pay $65,000 annually at the beginning of each year under the noncancelable lease.
Gelato Equipment Company, the lessor, agrees to remit all executory costs, estimated to be $3,450 per year.
The cost of the equipment is $275,000, and the fair value of the equipment is $305,000.
Its estimated life is 10 years.
The estimated residual value at the end of 5 years is $75,000 and is not guaranteed by Lakeshore Gelato; at the end of 10 years, it is $5,000.
There is no bargain purchase option in the lease or any agreement to transfer ownership at the end of the lease to the lessee.
The implicit interest rate is 12%.
On October 1 of each year, Gelato Equipment Company pays property taxes of $650, maintenance costs of $1,600, and insurance of $1,200.
Straight-line depreciation is considered the appropriate method by both companies.
REQUIRED:
1. Identify the type of lease involved for Lakeshore Gelato and Gelato Equipment Company and give reasons for your classifications.
2. Prepare appropriate journal entries for Year 1 for the lessee and lessor.

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