Required:

a. Classify this lease from the perspective of the lessor, Rapid Revolving Corp. Demonstrate all four tests and conclude operating or finance. If it is a finance lease, specify if it is manufacturing or direct financing and explain briefly why.

b. Prepare the journal entries on January 1, 2019 and December 31, 2019 for the lessor.

c. Assume that there was a bargain purchase option of $20,000 rather than an unguaranteed residual. Would your January 1 and December 31 calculations and entries change? Explain.

Soaring Pieces Inc. creates aluminum alloy parts for commercial aircraft. In a recent transaction Soaring leased a high precision lathe machine from Rapid Revolving Corp. on January 1, 2019. The following information pertains to the leased asset and the lease agreement Cost of lathe to lessor $140,000 Rapid's normal selling price for lathe (FMV) $178,268 Useful life 7 years Lease provisions Lease term 5 years Payment amount $40,000 Payment frequency Annual Payment timing December 31 Estimated residual value at end of lease Kunguaranteed) $20,000 interest rate Implicit in the lease (readily determinable by losseo) 7% Lessee's incremental borrowing rate 8% The lathe machine will revert back to the lessor at end of lease term, titlo does not transfer to lesses at any time, and there is not a bargain purchase opton