Barisi Equipment Company leases nonspecialized cutting machinery to Bastone, Inc. over a 4-year term. The lease commencement date is January 1, 2022. The first payment is due on January 1, 2022. The remaining payments are due on December 31, 2022, December 31, 2023, and December 31, 2024. The equipment has a fair value of $18,000 and an economic life of 10 years. Barisi carries the underlying asset at a cost of $15,500. The lease has no renewal or purchase options, and title to the underlying asset remains with Barisi at the end of the lease term. The annual lease payments are $4,500 per year with an estimated residual value of $1,200 upon lease termination. The residual value is not guaranteed by the lessee, and a third-party guarantee is not obtained by Barisi. There are no lease incentives offered, and the lessee pays for all maintenance to third parties. There are no initial direct costs.

Required

a. Determine the implicit rate in the lease.

b. Classify the lease for Barisi Equipment Company.

c. Prepare the journal entries for the lessor over the lease term and provide all supporting computations. The machine has a fair value of $1,200 at lease termination.