Bridgeport Dairy leases its milking equipment from Indigo Finance Company under the following lease terms.

1.		The lease term is 10 years, noncancelable, and requires equal rental payments of $32,500 due at the beginning of each year starting January 1, 2020.
2.		The equipment has a fair value at the commencement of the lease (January 1, 2020) of $245,529 and a cost of $260,000 on Indigo Finances books. It also has an estimated economic life of 15 years and an expected residual value of $14,000, though Bridgeport Dairy has guaranteed a residual value of $21,600 to Indigo Finance.
3.		The lease contains no renewal options, and the equipment reverts to Indigo Finance upon termination of the lease. The equipment is not of a specialized use.
4.		Bridgeport Dairys incremental borrowing rate is 8% per year. The implicit rate is also 8%.
5.		Bridgeport Dairy depreciates similar equipment that it owns on a straight-line basis.
6.		Collectibility of the payments is probable

A. Evaluate the criteria for classification of the lease, and describe the nature of the lease. In general, discuss how the lessee and lessor should account for the lease transaction.

B. Prepare the journal entries for the lessee and lessor at January 1, 2020, and December 31, 2020 (the lessees and lessors year-end). Assume no reversing entries