Operating Lease for Lessee

Lessor and lessee agreed to a noncancelable lease for which the following information is available. 1. The underlying asset with a fair value of $25,000 was new at the inception of the lease term. 2. Lease term is four years starting January 1 of Year 1. 3. Estimated useful life of the underlying asset is eight years. 4. On January 1 of Year 1, lessor and lessee estimated that the residual value of the underlying asset will be $9,000 on the purchase option date and zero at the end of its useful life. The residual value is not guaranteed. 5. Lessee's incremental borrowing rate is 7%. 6. Lessor's interest rate implicit in the lease is 7%. 8. Title to the underlying asset is retained by the lessor unless the purchase option is exercised. 9. Sales value of underlying asset on January 1 of Year 1 is $30,000. 10. Four annual lease payments will be made each January 1 during the lease term, and the first payment is due at inception of the lease term. Required a. Calculate the annual lease payment calculated by the lessor. b. Is this an operating lease or a finance lease to the lessee? d. Provide journal entries for the lessee on January 1 and December 31 of Year 1 and Year 2