Ayayai Corporation leased equipment to Kingbird, Inc. on January 1, 2020. The lease agreement called for annual rental payments of $1,151 at the beginning of each year of the 3-year lease. The equipment has an economic useful life of 7 years, a fair value of $9,900, a book value of $7,900, and Ayayai expects a residual value of $7,400 at the end of the lease term. Ayayai set the lease payments with the intent of earning a 4% return, though Kingbird is unaware of the rate implicit in the lease and has an incremental borrowing rate of 6%. There is no bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a specialized nature. Click here to view factor tables.

Determine the nature of the lease to both Ayayai and Kingbird.

The lease is a/an financingoperating lease to Kingbird.

The lease is a/an financingoperating lease to Ayayai.

Prepare all necessary journal entries for Kingbird in 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275. Record journal entries in the order presented in the problem.)