1. Muscat Leasing purchased a machine for $500,000 and leased it to Gulf, Inc. on January 1, 2013.

Related Information
Quarterly rental payments	$32,629 at the beginning of each period
Lease term	5 years (20 quarters)
Economic life of the machine	5 years
Implicit interest rate & lessee's incremental borrowing rate	12%
Fair value of the asset	$500,000

Required: [ 10 marks]

1. Explain how should this lease be classified, and provide a reason to support your answer? [ 2 marks]
2. Prepare appropriate entries for both Muscat and Gulf Inc. from the inception of the lease date for all the payments till end of 2013. Depreciation is recorded at the end of each fiscal year using straight line method (December 31). [ 8 marks]