On July 1st, 2024, the ABC Corporation, a manufacturer and distributor of DVD recorders, entered a lease with XYZ Rental Inc. ABC agreed to lease 20 DVDs for a period of six years beginning July 1st, 2024. Other lease terms as follows:

Annual Lease Payments beginning 01/07/24 -------------- $ 2,003

Manufacturing Cost of each DVD --------------------------- 300

Normal Selling Price of each DVD --------------------------- 525

Estimated economic (EUL) for the DVDs ----------------9 years

Implicit rate in the lease (not known by XYZ Rental)

Estimated Residual Value of each DVD at the end of the lease term 10 %

(not guaranteed by XYZ Rental) --------------------------- $ 80

XYZ Rental can borrow at 12% and agrees to assume full responsibility for all repairs and maintenance of the machines.

XYZ Rental will return the DVDs to ABC . Since XYZ is a good credit risk,

ABC is certain to collect the lease payments and will not incur any additional costs after the lease agreement date.

Both Companies follow ASPE Required:

1. Determine how ABC, the lessor, and XYZ, the lessee, should classify the lease.

2. Prepare all required journal entries for the Lessee on July 1st, 2024.

3. Prepare the required journal entries for the Lessee on December 31st, 2024 (assuming a December 31st Fiscal Year End).

4. Prepare the required journal entries for the Lessee on July 1st, 2025

5. Prepare the required journal entries for the Lessee on December 31st, 2025 (assuming a December 31st Fiscal Year End).

6. Assume that when the DVD's are returned to ABC at the end of the lease term, the residual value of each DVD is only $70. Prepare the journal entry to record the return of the machines by XYZ.