Preparing lessor's journal entries for an operating lease and a capital lease. Sun Microsystems manufactures an engineering workstation for \(\$ 7,200\) and sells it for \(\$ 12,000\). Although the workstation has a physical life of approximately 10 years, rapid technological change limits its expected useful life to three years. Sun leases a workstation to Design Consultants for the three-year period beginning January 2,

Year 2. The annual rental payments of \(\$ 4,386.70\) are due at the beginning of each year for that year. The interest rate appropriate for discounting cash flows is 10 percent. Sun uses a calendar year as its reporting period.

a. Does this lease qualify as an operating lease or a capital lease?

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

c. Repeat part b assuming that the lease qualifies as a capital lease.