On January 1, 1996, Parkview Co. (lessee) signs a 10-year noncancelable lease agreement to lease a storage building from AONE Storage Company (lessor). The following information pertains to this lease agreement:

The agreement requires equal rental payments of $78,314 beginning on December 31, 1996. The annual payment includes $5,000 as reimbursement of property taxes.

The fair value of the building on January 1, 1996 is $440,000. On AONEs book, it has a cost of $440,000.

The building has an estimated useful life of 15 years. The estimated residual value at the end of the lease term of $80,000 is guaranteed by Parkview. Parkview Co. depreciates similar buildings on the straight-line method. The lease is nonrenewable. At the termination of the lease term the building reverts back to the lessor.

There is no uncertainty concerning rental and all other payments.

Parkviews incremental borrowing rate is 12% per year. The lessors implicit interest rate is 12%, too.

The present value of 1 PV(i=12%, N=10) is 0.32197; The present value of an ordinary annuity of 1 PVA(i=12%, N=10) is 5.65022

Required: Based on this information answer the following questions. Show all computations and round amounts to the nearest dollar.

1. What kind of lease is it for Parkview Co.? Why?

2. Prepare the journal entry Parkview Co. would make with respect to the lease on January 1, 1996. 3. Prepare all entries Parkview Co. would make with respect to the lease obligation and leased asset on December 31, 1997 (note the year is 1997!!)

4. What kind of lease is it for AONE?

5. Write the journal entry AONE will make on 1/1/96. (Use the Net method.)

6. Write the journal entries AONE will make on 12/31/96 when it receives the first payment.