Edward Ltd. (lessee) and Frank Ltd. (lessor) both follow ASPE. Edward Ltd. leases its milking equipment from Frank Ltd. under the following lease terms:

1. The lease is dated May 30, 2018, with a lease term of 10 years. It is non-cancellable and requires equal rental payment of $26,000 due each May 30, beginning in 2018.
2. The equipment has a fair value and cost at the inception of the lease of $186,101 an estimated life of 12 years, and a residual value (which is guaranteed by Edward Ltd.) of $10,000.
3. The lease contains no renewal options and the equipment reverts to Frank Ltd. on termination of the lease.
4. Edward Ltd.s incremental borrowing rate is 9% per year; the implicit rate is also 9%.
5. Edward Ltd. uses straight-line amortization for similar equipment that it owns.
6. Collectability of the payments is reasonably predictable, and there are no important uncertainties about costs that have not yet been incurred by the lessor.

Required:

1. Calculate the present value of the minimum lease payments (PV factor of $1 annuity due at 9% is 6.99525. PV factor of $1 at 9% is 0.42241).
2. Explain how the lessee and the lessor classify this lease.
3. Prepare the journal entries for the lessee and the lessor at May 30, 2018, and at December 31, 2018. The lessees and lessors fiscal year ends are December 31.
4. Prepare the journal entries at May 30, 2019 for the lessee and the lessor.