C. On January 1, 2021, Jack leased a warehouse from Luna. The lease specified annual payments of $15,000 beginning January 1, 2021, and each January 1 through 2024. Lunas rate for determining payments was 12%. At the end of the lease, the warehouse was expected to be worth $5,000. The estimated life of the warehouse is 5 years with no salvage value used in depreciation calculations. Luna and Jack use straight-line depreciation.

Jack guaranteed a residual value of $2,500. Jacks incremental borrowing rate is 8%.

A $800 per year cleaning agreement was arranged for the warehouse with an outside service firm. During contract negotiations, Luna agreed to pay this fee and included it in the $15,000 lease payment.

1. How should this lease be classified by Luna and by Jack and why?

2. Prepare the amortization schedule and all journal entries for Luna.

3. Prepare the amortization schedule and all journal entries for Jack.