On January 1, 2016, Murray Designs Inc. (lessee) entered into a 4 year, non-cancellable contract to lease computer equipment from Orange Computer Company (lessor). Annual rental fee of $14,500 are to be paid each January 1 (starting on January 1, 2016) At the end of the lease period, the computer equipment will be returned to Orange Computer Company. The cost to the computer equipment to Orange was $45,000 and it has an estimated useful life of no more than 5 years and an estimated $5,000 residual value. Murray guaranteed the lessor a residual value of $5,000. Murray has an incremental borrowing rate of 12%. Orange used a rate of 10% in setting annual rental payments. Murray is a well-established design company in Eastern Canada and Orange is not concerned with Murrays ability to make the payments. Orange had also offered to Murray to purchase the equipment at the regular market price of $55,000. Both companies report under ASPE

Required:

1. Describe what type of lease this is for Murray AND for Orange. Support your decision by discussing all the lease criteria under ASPE and clearly indicate if the criteria is / are met or not met.

2. Prepare the journal entries for Murray and Orange on January 1, 2016.

3. Prepare the journal entries for January 1, 2017 for Murray and Orange. Assume that no adjusting entries were made on December 31, 2016