Anthem Dairy leases its milking equipment from Superior Finance Company under the following lease terms.

1. The lease term is 10 years, noncancelable, and requires equal rental payments of $50,300 due at the beginning of each year starting January 1, 2014.

2. The equipment has a fair value and cost at the inception of the lease (January 1, 2014) of $220,404, an estimated economic life of 10 years, and a residual value (which is guaranteed by Anthem Dairy) of $20,000.

3. The lease contains no renewable options, and the equipment reverts to Superior Finance Company upon termination of the lease.

4. Anthem Dairys incremental borrowing rate is 9% per year. The implicit rate is also 9%.

5. Anthem Dairy depreciates similar equipment that it owns on a straight-line basis.

6. Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.

A. (2 points) Evaluate the criteria for classification of the lease. How should the lessee and the lessor account for the lease?

B. ( 4 points) Prepare the journal entries for the lessee at January 1, 2014 and December 31, 2014 (their year-end).

C. (4 points) Prepare the journal entries for the lessor at January 1, 2014 and December 31, 2014 (their year-end).