Accounting for lease by lessor and lessee. IBM manufactures a particular computer for

$6,000 and sells it for $10,000. Adair Corporation needs this computer in its operations and contemplates three ways of acquiring it on January 1, 2008. The computer has a three-year estimated useful life and zero salvage value. Both firms use the straight-line depreciation method.

(1) Outright Purchase: Adair Corporation will borrow $10,000 from its bank and purchase the computer from IBM. The bank loan bears interest at 8% annually and requires payments of $3,880, which includes principal and interest, on December 31 of 2008, 2009, and 2010.

(2) Operating Lease: Adair Corporation will lease the computer from IBM and account for it as an operating lease. IBM sets the annual payment due on December 31, 2008, 2009, and 2010 at $3,810.

(3) Capital Lease: Adair Corporation will lease the computer from IBM and account for it as a capital lease, using an annual interest rate of 7%. The annual payment due on December 31 of 2008, 2009, and 2010 is $3,810.

a. Give the journal entries on the books of Adair Corporation on January 1, 2008, December 31, 2008, and December 31, 2009, related to the loan and acquisition of the equipment assuming the outright purchase alternative.

b. Repeat part a assuming the operating lease alternative.

c. Repeat part a assuming the capital lease alternative.

d. Give the journal entries on the books of IBM on January 1, 2008, December 31, 2008, and December 31, 2009, related to the sale of the equipment assuming the outright sales alternative

e. Repeat part d assuming the operating lease alternative.

f. Repeat part d assuming the capital lease alternative.

g. Prepare a schedule of the total expenses incurred by Adair Corporation for 2008, 2009, and 2010 under each of the three alternatives.

h. Prepare a schedule of the total revenues and total expenses recognized by IBM for 2008, 2009, and 2010 under each of the three alternatives.