On January 1, 2019, the Sonterra Company (the lessee) leases nonspecialized equipment for five years, agreeing to pay $137,000 annually at the beginning of each year under the noncancelable lease. El Paso Equipment Company, the lessor, agrees to pay for a yearly maintenance agreement the costs of which are estimated to be $7,000 per year. The cost and also fair value of the equipment is $650,000. Its estimated life is 7 years. There is no bargain purchase option in the lease nor any agreement to transfer ownership at the end of the lease to the lessee. Sonterras incremental borrowing rate is 12% and the rate implicit in the lease is 11%, which is known to Sonterra. Straight-line depreciation is considered the appropriate method for the companys assets. Required:

1. Identify the type of lease involved for the lessee and give reasons for your classifications.

2. Prepare appropriate journal entries for 2019 and 2020 for the lessee.

3. If $180,000 of the residual value at the end of five years is guaranteed by the lessee but the residual is only expected to be $160,000, identify the type of lease.

4. Prepare journal entries for 2019 for the lessee assuming the residual value is guaranteed by the lessee.