On January 1, 2013, ABC Company leased a copier from XYZ, Inc. XYZ Inc. purchased the equipment from PQR at a cost of $204,576. The lease agreement specifies annual payments (see payment schedule) beginning January 1, 2013, and the remainder annually at the lease anniversary date. The four-year lease term ending December 31, 2016 is equal to the estimated useful life of the copier. ABC Company paid a commission of $9,000 to arrange this lease.

Payment Schedule:

January 1, 2013 $50,000

January 1, 2014 $53,000

January 1, 2015 $56,000

January 1, 2016 $60,000

a) How would this lease be classified? Explain your answer.

b) What is the appropriate discount rate to use? Explain

c) Prepare the journal entries on January 1, and December 31, for each of the four years for ABC Company.