On July 1, 2020, AMC entered into a lease agreement to lease specialty equipment for a 6-year term. Annual lease payments are $20,000, payable at the beginning of each lease year (July 1). At the end of the lease the leased asset will revert to the lessor. The assets economic life is estimated at 7 years. AMC could have obtained equivalent financing from its bank at a rate of 14%.

AMCs fiscal year end is December 31. AMC uses straight-line amortization for its equipment.

Required:

1. Prepare the journal entry(ies) for AMC for the 2020 fiscal year related to the lease arrangement.
2. Compare and contrast the effect on financial statements if a lease is classified as an operating lease versus a capital lease.