Saola has traditionally purchased all of its manufacturing equipment. However, in $2022$ they were

unable to find a vendor willing to sell them a new $$12,426,000$ machine. After some careful

negotiations, however, they were able to lease the needed equipment for $5$ years. At the end of the lease

Saola will have the option to purchase the equipment for $$994,000,$ the estimated fair value at the end

of the lease. They currently plan to exercise the option and keep the equipment at the end of the lease,

but that could change if they find a better option.

The machine has an estimated economic life of $7$ years with no salvage value. The payments on the

lease will be $$2,412,148.$ Saola does not know the implicit interest rate used by the vendor, but their

incremental interest rate is $6\mathrm{.}0\%.$ The lease period began on May $1,2022$ and the first payment was

made that day. Subsequent payments will be made each year and should be paid one day before the

start date to ensure that no late penalties are accrued. In addition to the first payment, Saola paid

$$18,000$ in legal and other lease origination fees on May $1,2022$

#$1$ Make journal entries to account for lease

#$2$ Make changes to financial statements

#$3$ Find Profit Margin, Debt$-$to$-$ equity and ROA ratios

#$4$ How will this lease be classified? How does it affect risk?