ABC Corporation, a private corporation, has acquired equipment with a fair market value of

$145,000 on January 1, 2020 by signing a 5-year lease agreement that requires annual lease payments of $24,000 beginning on January 1, 2020. The leased equipment will go back to the lessor after the lease term. ABC Corporation has the option to purchase the equipment at the end of the lease term at the equipment's fair market value at that time. The economic life of the equipment is 8 years and the present value of the lease payments is $100,077.

Instructions:

a)Analyze the details of the lease agreement and determine whether it should be classified as an operating or a capital lease by ABC Corporation in accordance with ASPE.

b)Based upon your answer in a), record the journal entry that would be made by ABC Corporation on January 1, 2020.

a)

b)

Date

Accounts

Debit

Credit