Rebecca Company acquired an equipment on a 10-year noncancelable lease on January 1, 20X1. There were annual lease payments of $100 at the end of each of the ten years.The market interest rate was 10% compounded annually. Assume that the lease year coincides with the fiscal year. Present value of $1 annuity (n=10, i=10%) = 6.1446. Note that the useful life of the equipment is 12 years.

1. According to GAAP, is the above lease a capital or an operating lease? Why?
2. Irrespective of your answer to part 1, assume that the lease is a capital lease. Show the entries that the company will make at the inception of the lease and during the first two years of the lease term. (Use straight-line amortization method)