Assume that on 1-1-2012, Gerber Co entered into a non-cancelable lease agreement to lease a piece of equipment from Shaw leasing Co with the following terms:

• Term is 8 years, non-cancelable.
• The payments are $84,500 per year starting 1-1-2012 for 8 years.
• The equipment has an estimated economic life of 10 years in total, and the equipment reverts to the lessor after the 8 years with no guaranteed residual value.
• Gerbers incremental borrowing rate is 10% and the lessors rate in the lease is unknown.
• The fair value of the equipment is $539,000 on 1-1-2012.
• Gerber normally depreciates this type of equipment over 8 years with no residual value.

Required:

What lease criteria determines the type of lease?

Prepare the journal entries for 2012 & 2013