On December 31, 2019, Sage Hill Corporation signed a 5-year, non-cancelable lease for a machine. The terms of the lease called for Sage Hill to make annual payments of $9,110 at the beginning of each year, starting December 31, 2019. The machine has an estimated useful life of 6 years and a $5,000 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Sage Hill uses the straight-line method of depreciation for all of its plant assets. Sage Hills incremental borrowing rate is 6%, and the lessors implicit rate is unknown.

What type of lease is this? Operating or Finance?

Compute the present value of the lease payments.

Prepare all necessary journal entries for Sage Hill for this lease through December 31, 2020

Date Account Titles and Explanation Debit Credit (To record the lease) (To record first lease payment) (To record amortization of the right-of-use asset) (To record interest expense)