Lease question

On 1 January 2009, Shrub Co entered into an agreement to lease a machine that had an estimated life of four years. The lease period is also four years at which point the asset will be returned to the leasing company. Shrub is required to pay for all maintenance and insurance costs relating to the asset amounting to 2,000 per year. The minimum lease payment is $8,000 are payable in advance from 1 January 2009. The machine is expected to have a nil residual value at the end of its life. The machine had a fair value of $28,000 at the inception of the lease. The lessor includes a finance cost of 10% per annum when calculating annual rentals. Moreover, the factor for discounting is 3.4869. (Note: minimum lease payment is without executory costs and annual lease payments include executory cost).

Instructions

1. Explain how leases work.
2. Complete all 4 tests of capitalization.
3. Complete the first four journal entries for the lessee. Explain All Steps Briefly