Sable Inc. $($Sable$)$ is a company based in San Francisco that manufactures and supplies

earthmoving and construction equipment. Sable either sells the equipment to customers or

leases it under terms specific to a customer$$s needs. Buildit Inc. $($Buildit$)$ is a growing

construction company in Los Angeles that specializes in building residential properties.

Buildit recently entered into a contract with Sable to lease a bulldozer, which Buildit will

use for a new project involving the construction of several condominiums in the Los

Angeles 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 estimated

to 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 also

responsible for all maintenance, insurance, and taxes arising from the lease of the

bulldozer.

$$ The residual value of the bulldozer is estimated to be $$24,000$ at the end of the

lease term. Sable does not have a residual value guarantee.

$$ The lease does not transfer ownership of the bulldozer to Buildit by the end of the

lease term or provide an option for Buildit to purchase the equipment.

$$ The bulldozer costs Sable $$100,000$ to manufacture, and this model is currently

listed 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. In

addition, the equipment is fully constructed and no additional costs will be incurred to

complete production of the bulldozer before lease commencement.

As a result of a recent economic downturn that has directly affected the construction

industry, a number of companies in the industry have modified their sales or lease terms to

maintain profitability. Some of Sable$$s direct competitors have negotiated lower lease

payments 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 recently

sold for an average sales price of $$125,000,$ as opposed to Sable$$s current list price of

$$135,000.$

The rate implicit in the lease is $6\mathrm{.}9336$ percent assuming the fair value of the bulldozer is

$$125,000$ at the beginning of the lease term and $5\mathrm{.}45$ 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 $1.$