On January 1, 2019, Lessee enters into a 5-year lease of equipment with annual lease payments of $59,000, payable at the end of each year.

At the end of Year 5, Lessee has an option to purchase the equipment for $5,000.

The exercise price of the purchase option is significantly discounted from the expected fair value of the equipment at the time the purchase option becomes exercisable.

Therefore, lessee concludes that it is reasonably certain to exercise the purchase option.

The expected residual value of the equipment at the end of the lease is $75,000.

The fair value of the equipment at the commencement date is $250,000.

The economic life of the leased equipment is 7 years.

Lessee is not aware of the discount rate implicit in the lease.

Lessees incremental borrowing rate is 6.5 percent.

Required:

(a) Determine the lease classification for the lessee (consider all "lease tests").

(b) Prepare the amortization schedule for the lease liability.

(c) Prepare the journal entries on the lessee's books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease over the life of the lease. Lessee's fiscal year-end is December 31.