BabyClothing (BC) Enterprises leases digital imaging equipment from Sally Systems Leasing. The lease term is for 3 years and the economic life of the equipment is 5 years. The lease contract does not contain a purchase option and title will not be transferred m the end of the lease term. The fair value of the equipment is $ 5.500 and there is no guaranteed residual value. Sally Systems does not offer any incentives to the lessee to enter the lease. B C paid $550 in initial direct costs on the lease commencement dale. BC's incremental borrowing rate is 4 % and is used to measure the present value because the lessor's implicit rate is nor readily determinable. The annual lease payments (due on January 1 of each year) are $990, which includes technological consulting over the lease term. The digital imaging equipment is typically leased for $900 per year and the consulting is provided at a price of $450 per year. BC has not made the election to account for each separate lease component along with nonlease components as a single lease component. As a result, the components must be separated.

Required

a. Classify the lease for BC Enterprises.

b. Prepare the journal entries for the lessee and supporting amortization tables to account for this agreement over the lease term.