Diamond Company, a machinery dealer, leased a machine to Turtle Corporation on January 1, 2017. The lease is for an 8-year period and requires equal annual payments of $63,807 at the

beginning of each year. The lease arrangement is noncancellable. The first payment is received on January 1, 2017. Diamond had purchased the machine during 2016 for $376,000. Collectability of lease payments by Diamond is probable. Diamond set the annual rental to ensure a 6% rate of return. The machine has an economic life of 9 years with no residual value and reverts to Diamond at the termination of the lease.

(a) Discuss the nature of the lease arrangement. Is it an operating lease or a finance lease?

(b) Prepare all necessary journal entries for Diamond for 2017.

(c) Now assume that, in addition to the annual payments of $63,807 at the beginning of each year, Turtle Corp. agrees to guarantee the $5,000 residual value of the asset at the end of the lease term. Turtle expects that the asset will have a residual value of $6,000 at the end of the lease term. What is the present value of the lease for Turtle Corp (the lessee)? What is the present value of the lease for Diamond (the lessor)?

Please show your calculations.