On January $1,$ Year $1,$ Lakeshore Gelato $($Lessee$)$ leases nonspecialized equipment for $5$ years, agreeing to pay $$65,000$ annually at the beginning of each year under the noncancelable lease.

Gelato Equipment Company, the lessor, agrees to remit all executory costs, estimated to be $$3,450$ per year.

The cost of the equipment is $$275,000,$ and the fair value of the equipment is $$305,000.$

Its estimated life is $10$ years.

The estimated residual value at the end of $5$ years is $$75,000$ and is not guaranteed by Lakeshore Gelato; at the end of $10$ years, it is $$5,000.$

There is no bargain purchase option in the lease or any agreement to transfer ownership at the end of the lease to the lessee.

The implicit interest rate is $12\%.$

On October $1$ of each year, Gelato Equipment Company pays property taxes of $$650,$ maintenance costs of $$1,600,$ and insurance of $$1,200.$

Straight$-$line depreciation is considered the appropriate method by both companies.

REQUIRED:

$1.$ Identify the type of lease involved for Lakeshore Gelato and Gelato Equipment Company and give reasons for your classifications.

$2.$ Prepare appropriate journal entries for Year $1$ for the lessee and lessor.