Renter's Dilemma Hucks, Inc. (Hucks), a publicly traded corporation, plans to lease equipment from Jackson Co. (Jackson) on January 1, 2020, for a period of three years. Lease payments of $100,000 are due to Jackson each year. Other expenses (e.g., insurance, taxes, and maintenance) are also to be paid by Hucks and amount to $2,000 per year. Jackson will not incur any initial direct costs. The lease contains no purchase or renewal options and the equipment reverts back to Jackson on the expiration of the lease. The remaining useful life of the equipment is four years. The fair value of the equipment at lease inception is $265,000. Hucks has guaranteed $20,000 as the residual value at the end of the lease term. The $20,000 represents the expected value of the leased equipment to Hucks at the end of the lease term. The salvage value of the equipment is expected to be $2,000 after the end of its economic life. Hucks's incremental borrowing rate is 11 percent (Jackson's implicit rate is 10 percent and is calculable by Hucks from the lease agreement). The junior accountant of Hucks analyzed the assets under lease, determined whether the lease was an operating lease or finance lease, and prepared the applicable journal entries. The senior accountant of Hucks reviewed the junior accountant's analysis and prepared a separate analysis. As the finance controller, you were given both analyses to determine the correct accounting treatment. Calculations and journal entries performed by your junior and senior accountant follow: Present Value of the Lease Obligation Using the rate implicit in the lease (10 percent), the present value of the guaranteed residual value would be $15,026 ($20,000 x 0.7513), and the present value of the annual payments would be $248,685 ($100,000 x 2.4869). Using the incremental borrowing rate (11 percent), the present value of the guaranteed residual value would be $14,624 ($20,000 x 0.7312), and the present value of the annual payments would be $244,371 ($100,000 x 2.4437). Junior accountant analysis: Since the equipment reverts back to Jackson, it is an operating lease. Entry to be posted in years 1, 2, and 3: Dr. Rent expense $100,000 Dr. Insurance expense $2,000 Cr. Cash $102,000 (Operating lease rental paid to Jackson) Year Cash Payment Interest Expense (11%) Reduction in Lease Obligation Balance of Lense Obligation $244,371 $171,252 $98,133 $25,014 $100,000 $100,000 $100,000 $26,881 $26,881 $26,881 $73,119 $73,119 $73,119 3 Entry to be posted in year 1 for capitalization of equipment: Db. Equipment Cr. Lease obligation $244,371 $244,371 Entry to be posted in years 1, 2, and 3 for payment: Dr. Rent expense $2,000 Dr. Interest expense $26,881 Dr. Lease obligation $73,119 Cr. Cash (Finance lease rental paid to Jackson) $102,000 Required: Are either of the above analyses correct? If so, which one? If not, why not and what would need to be changed? Please provide appropriate codification support for your conclusions