n January $1,2016,$ Caswell Company signs a $10-$year cancelable $($at the option of either party$)$ agreement to lease a storage building from Wake Company. The following information pertains to this lease agreement:

$1.$ The agreement requires rental payments of $$100,000$ at the end of each year.

$2.$ The cost and fair value of the building on January $1,2016,$ is $$2$ million.

$3.$ The building has an estimated economic life of $50$ years, with no residual value. Caswell depreciates similar buildings according to the straight$-$line method.

$4.$ The lease does not contain a renewable option clause. At the termination of the lease, the building reverts to the lessor.

$5.$ Caswell$$s incremental borrowing rate is $14\%$ per year. Wake set the annual rental to ensure a $16\%$ rate of return $($the loss in service value anticipated for the term of the lease$).$

$6.$ Executory costs of $$7,000$ annually, related to taxes on the property, are paid by Wake.

Required:

$1.$ Examine and evaluate each capitalization criteria and determine what type of lease this is for the lessee.

$2.$ Prepare appropriate journal entries on the lessee$$s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years $2016$ and $2017.$CHART OF ACCOUNTS

Caswell Company

General Ledger

ASSETS

$111$ Cash

$121$ Accounts Receivable

$141$ Inventory

$152$ Prepaid Insurance

LIABILITIES

$211$ Accounts Payable

$231$ Salaries Payable

$261$ Income Taxes Payable

EQUITY

$311$ Common Stock

$331$ Retained Earnings

REVENUE

$411$ Sales Revenue

EXPENSES

$500$ Cost of Goods Sold

$511$ Insurance Expense

$512$ Utilities Expense

$513$ Rent Expense

$521$ Salaries Expense

$532$ Bad Debt Expense

$540$ Interest Expense

$541$ Depreciation Expense

$559$ Miscellaneous Expenses

$910$ Income Tax Expense