On December 31, 2020, Salah signs a 10-year, non-cancelable agreement to lease a storage building from Liverpool Storage Company. The following information pertains to this lease agreement.

1. The agreement requires equal rental payments of $80,450 beginning on December 31, 2020.
2. The building has an estimated economic life of 13 years; and a guaranteed residual value of $100,000 and an expected residual value of $70,000 at the end of the lease term.
3. The fair market value of the building at the signing of the lease equals $650,000.
4. The lease is nonrenewable. At the termination of the lease, on January 1, 2031, the building reverts to the lessor.
5. Salahs incremental borrowing rate is 8% per year. The lessors implicit rate is not known by Salah
6. Salahs fiscal year-end is December 31.

Instructions

(a) Should Salah classify this as an operating or financing lease? Carefully explain why?

(b) Compute the amount at which the lease should be capitalized.

(c) Prepare the necessary journal entries on December 31, 2020.

(d) Prepare the necessary journal entries on December 31, 2021.

(e) Prepare the necessary journal entry on January 1, 2031, when the building reverts to the lessor, and the actual residual value is determined to be $65,000.