ABC Inc. is a public company based in Manchester, TN, that manufactures and supplies construction equipment. ABC either sells the equipment to customers or leases it under terms specific to a customers needs. XYZ Construction Inc. is a growing construction company in Nashville, TN, that specializes in building residential properties. XYZ Construction entered into a contract effective January 1, 2019 with ABC to lease construction equipment, which XYZ Construction will use for a new project involving the construction of a high-rise office building in the Oklahoma City area. The pertinent terms of the lease are as follows: The lease term is for 10 years, while the economic life of the construction equipment is estimated to be 15 years and the equipment is new at the time of the lease. Annual lease payments of $17,000 are due at the end of each year. The first payment is due December 31, 2019. XYZ Construction is also responsible for all maintenance, insurance, and taxes arising from the lease of the construction equipment. The residual value of the construction equipment is estimated to be $24,000 at the end of the lease term. ABC does not have a residual value guarantee. The lease does not transfer ownership of the construction equipment to XYZ Construction by the end of the lease term or provide an option for XYZ Construction to purchase the equipment. XYZ expects to be able to either sell or lease the equipment when it is returned. The construction equipment costs ABC $100,000 to manufacture and this model is currently sells for $135,000 should customers wish to purchase it outright. ABC believes that the lease payments from XYZ Construction will be collected when they are due. In addition, the equipment is fully constructed and no additional costs will be incurred to complete production of the construction equipment before lease commencement. The rate implicit in the lease is 7% and is known to XYZ. ABCs incremental borrowing rate is 6%. Required: 1. How should ABC classify the lease in its accounting records? How should XYZ classify the lease in its accounting records? 2. Provide the journal entries that ABC should record to account for the first year of the lease. Provide authoritative support for positions taken.