On January 1, 2012, Cubs, Inc. engaged in a lease agreement with Dodgers Manufacturing for the use of equipment with an estimated economic life of five years. The term of the lease is four years and requires four annual payments of $100,000 beginning January 1, 2012 and continuing on December 31 of every year from 2012 to 2014. The equipment is not specialized. Dodgers Manufacturing incurred $5,000 in costs related to obtaining credit reports on Cubs and closing the lease arrangement. Cubs incurred no initial direct costs. The equipment cost Dodgers $350,000 to manufacture and the fair value of the equipment is $379,760. The lease terms follow:

- Cubs guarantees that the equipment returned to Dodgers on December 31, 2015 will be worth $30,000.

- There is no transfer of the asset at the end of the lease term and no purchase option.

- The rate implicit in the lease is 8%, and is known to Cubs.

Required:

A. What type of lease has each party signed? Explain in terms of the new US GAAP standard. (3 pts)

B. Prepare all of the 2012 journal entries for both the lessor and lessee. (12 pts)

C. Prepare all of the 2015 journal entries for both the lessor and lessee, assuming that the fair value of the equipment at the end of the lease (12/31/15) is $30,000. How would your answer differ if the equipments fair value is $27,000 at the end of the lease? (4 pts)

D. Now assume that the $30,000 residual value is estimated by Dodgers and is not guaranteed. Answer parts a., b., and c. above under this for Dodgers (Lessor) only. (8 pts)