For the following leases of Memorial Hospital, determine the appropriate

classification of each lease $($finance or operating$)$ and its proper treatment on the

financial statements. Prepare an amortization schedule for each lease $($this part is

NOT actually required for the entire term of the lease$).$ In addition, prepare the

journal entries to record the lease on the financial statements as of January $1,2018$

$($assuming a calendar fiscal year$)$ and the subsequent year$-$end entries for $2018,$

$2019,$ and $2020$ that reflect proper treatment using the new requirements for

accounting for leases. Please present and SUMMARIZE the difference between

operating and financing leases

A lease would be classified as a finance lease if$,$ A$)$ the lease transfers ownership of the underlying asset, B$)$ there is reasonable certainty that an option to purchase the underlying asset will be exercised, C $)$ the lease is for the majority of the remaining economic life of the underlying asset, D$)$the present value of the sum of the lease payments and residual value guarantee equals or exceeds the fair value of the underlying asset, E$)$ or the underlying asset is so specialized that there is no alternative use at the end of the lease term. If a lease does not meet any of these criteria, then it should be classified as an operating lease.

$1)$ Lease $1$The lease was entered into on November $1,2012$ with Beaugard

Properties for a medical office tower attached to the hospital. The lease was

for $10$ years with an option to renew for an additional $10$ years. The lease

called for monthly payments in the amount of $$17,397\mathrm{.}76,$ with a $3\%$ annual

increase. The estimated value of the medical office tower was $$7,500,000.$

The incremental borrowing rate at the time the lease was finalized was $6\mathrm{.}3\%.$

$2)$ Lease $2$The lease was entered into on January $1,2013$ with Smith Family

Trust for land that the hospital occupied. The lease was for $20$ years with two

options to renew for $20$ years each. The lease called for monthly payments in

the amount of $$20,472\mathrm{.}07,$ with a $5\%$ increase every $10$ years. The estimated

value of the property was $$6,200,000.$ The incremental borrowing rate at the

time the lease was finalized was $6\mathrm{.}7\%.$

$($ Please include all the Journal Entries required for each lease. As well as all required formulas with the calculations. Also the lease classifications for each lease.$)$ Thank you.