Preparing lessee's journal entries for an operating lease and a capital lease. On January 2, Year 6, Baldwin Products, as lessee, leases a machine used in its operations. The annual lease payment of \(\$ 10,000\) is due on December 31 of Year 6, Year 7, and Year 8. The machine reverts to the lessor at the end of three years. The lessor can either sell the machine or lease it to another firm for the remainder of its expected total useful life of five years. Baldwin Products could borrow on a threeyear collateralized loan at 12 percent. The market value of the machine at the inception of the lease is \(\$ 30,000\).

a. Is this lease an operating lease or a capital lease?

b. Assume that this lease qualifies as an operating lease. Give the journal entries for Baldwin Products over the three-year lease period.

c. Assume that this lease qualifies as a capital lease. Repeat part b.

d. Compute the total expenses for the three-year period under the operating and capital lease methods.