On $1/1/2012,$ KCR$,$ Inc. enters into a $10-$year non$-$cancellable lease for a piece of machinery owned by BUF, Inc. The lease calls for annual payments of $$18,000,$ payable at the beginning of each year o the lease $($i$.$e$.$ first payment due on $1/1/2012).$ At the end of the lease, the right to use the machine transfers back to BUF with no option for KCR to purchase the machine at that point. KCR$,$ Inc. declined the opportunity to purchase the machine outright for $$175,000,$ and the economic life of th machine is estimated at $15$ years. There is an option to renew the lease for an additional $5$ years at reduced rate of $$15,000.$ This does not constitute a bargain renewal option. KCR$,$ Inc. uses a $5\%$ discount rate for present values, and straight line amortization on leased assets.

In addition, KCR spends $$20,000$ to customize the machinery for their use. They believe the custon components have a useful life of $15$ years. KCR typically uses straight line depreciation.

What type of lease will KCR decide this is$?$

What $($if any$).$ journal entries should KCR make on $\frac{1}{1}\frac{?}{2012}?$

What $($if any$).$ journal entries should KCR make on $12/31/2012?$