Dr. Frankenstein Inc. constructs laboratory equipment with an estimated life of 5 years and leases it to Dr. Jekyll Inc. for a period of 3 years beginning on January 1^st, 2017. The normal selling price of this equipment is $120,000 and its value at the end of the lease term is estimated to be $35,000. Jekyll agrees to make annual payments at the beginning of each year for the equipment, and guarantees that the equipment will be worth at least $29,000 at the end of the lease. Jekyll anticipates the value of the asset at the end of the lease will be $26,000. Frankenstein incurred costs of $100,000 to construct the equipment, paid $4,000 in advertising costs, and $3,500 in commission fees to its agent Igor. Frankenstein sets the annual payments based on the fair market value of the equipment and requires an 8% return on the lease. They have determined that collectability of the lease payments is reasonably assured. Both companies have December 31^st fiscal year ends and depreciate their assets using the straight-line method. Dr. Jekyll has a 10% borrowing rate and does not know the implicit rate on the lease. Jekyll also incurred $2,000 in document preparation and legal fees for the lease contract. The asset is not specific in nature and has an estimated salvage value of $3,000.

Instructions:

1. Compute the annual payments Frankenstein requires for the lease.

2. Classify the lease for both the lessor and the lessee.

3. Prepare the lessors amortization table and make the lessors entries for the life of the lease. Assume the asset is worth $25,000 at the end of the lease.

4. Prepare the lessees amortization table and make the lessees entries for the life of the lease. Assume the asset is worth $25,000 at the end of the lease. How would the final entry change if the asset was worth $35,000?

5. Redo questions 2-4 assuming that a third party provides the $29,000 residual value guarantee. For this part, assume the lessor incurred no initial direct costs.

6. Assume that the lessor classified the lease as an operating lease instead of a sales-type lease. Write the lessors entries for the life of the lease. Assume a final asset value of $25,000.

7. How does the total revenue recognized by the lessor over the entire life of the lease compare between the three classifications: sales-type, direct finance and operating?

I need this as soon as possible in about 2 hours please. I need to answer all of the parts of the questions. Thanks