Sable Inc. is a company based in San Francisco, CA, that manufactures and suppliesearthmoving and construction equipment. Sable either sells the equipment to customers orleases it under terms specific to a customers needs. Buildit Inc. is a growing constructioncompany in Los Angeles, CA, that specializes in building residential properties.Buildit recently entered into a contract with Sable to lease a bulldozer, which Buildit willuse for a new project involving the construction of several condominiums in the LosAngeles area. The pertinent terms of the lease are as follows: The lease term is for 10 years, while the economic life of the bulldozer is estimatedto be 15 years. The useful life of the bulldozer is also estimated to be 15 years. Annual lease payments of $16,000 are due at the end of each year. Buildit is alsoresponsible for all maintenance, insurance, and taxes arising from the lease of thebulldozer. The residual value of the bulldozer is estimated to be $24,000 at the end of thelease term. Sable does not have a residual value guarantee. The lease does not transfer ownership of the bulldozer to Buildit by the end of thelease term or provide an option for Buildit to purchase the equipment. The bulldozer costs Sable $100,000 to manufacture and this model is currentlylisted for sale at $135,000 should customers wish to purchase it outright.Sable believes that the lease payments from Buildit will be collected when they are due. Inaddition, the equipment is fully constructed and no additional costs will be incurred tocomplete production of the bulldozer before lease commencement.As a result of a recent economic downturn that has directly impacted the constructionindustry, a number of companies in the industry have modified their sales or lease terms tomaintain profitability. Some of Sables direct competitors have negotiated lower leasepayments or reduced their selling prices in an effort to stimulate sales. For example,several bulldozers with the same specifications as the one leased to Buildit have recentlysold for an average sales price of $125,000, as opposed to Sables current list price of$135,000.The rate implicit in the lease is 6.93 percent assuming the fair value of the bulldozer is$125,000 at the beginning of the lease term and 5.45 percent assuming the fair value is$135,000.Required:1. How should Sable classify the lease in its accounting records?2. Provide the journal entries that Sable should record to:a. Initially record the lease.b. Account for the first lease payment made to Sable at the end of year 1.Copyright 2014 Deloitte Devel