Question $$ I and

ABC Company, as a lessee, enters into a lease agreement for equipment on Jan $1,2019$ with XYZ bank, as a lessor. The following data are relevant to the lease agreement:

$1.$ The term of the non$-$cancelable lease is $6$ years, with no renewal option.

$2.$ Payments of the contract as follow:

$$200,000$ as a down payment on the date of signing the contract. Then $5$ equal payments of $$211,038$ are due on Jan $1$ of each year, beginning Jan $1,2020.$

$3.$ The fair value of the equipment on Jan $1,2019$ is $$1,000,000.$ The equipment has an economic life of $6$ years with no salvage value.

$4.$ ABC company and XYZ bank depreciate machinery on the straight$-$line basis.

$5.$ ABC company$$s incremental borrowing rate is $10\%$ per year.

Instructions

$($a$)$ Indicate the type of lease applicable for ABC Company and the XYZ Inc. and why?

$($b$)$ Prepare the journal entries on ABC Company$$s and and XYZ Company records that relate to the lease agreement for the following dates:

$1.$ Jan $1,2019,$ December $31,2019,$ Jan $1,2020$ and December $31,2020.$

$($c$)$ show the effect on the financial statements for ABC Company and XYZ Company on $31$st Dec $2019$ and $2020.$