On January 1, 2013, Orr Company sells heavy equipment to Foible Company for $3 million then immediately leases it back. The relevant information is as follows:

• Orr Company purchased the heavy equipment on January 1, 2013 for $2,100,000.

• The lease is noncancelable and has a term of 8 years.

• The annual rentals are $603,908.50, payable at the end of each year.

• The seller-lessee agrees to pay all executory costs.

• The interest rate implicit in the lease is 12%.

• The purchaser-lessor incurs no material initial direct costs.

• The collectibility of the rentals is reasonably assured, and there are no important uncertainties surrounding the amount of un-reimbursable costs yet to be incurred by the lessor.

• Orr's incremental borrowing rate is 12%, and the company estimates that the economic life of the equipment is 8 years.

• The present value on January 1, 2013, of 8 payments of $603,908.50, discounted at 12%, is $3 million ($603,908.50 × 4.967640).

• The executory costs for 2013 are:

Repairs and maintenance ........................$10,200

Property taxes ..................................... 20,500

Insurance ........................................... 18,000

Required:

1. What type of lease is this to the seller-lessee? Discuss.

2. Prepare the journal entries for both the seller-lessee and the purchaser-lessor for 2013 to reflect the purchase of the heavy equipment by Orr and the sale and leaseback agreement. Assume that Orr uses the straight-line depreciation method.