The Dalton Co$.$ signed an agreement to lease a machine from the Evans Co$.$ on January $1,2023.$ The Dalton Co$.$ depreciates all machinery they own using the straight$-$line method. The terms of the agreement follow:

Ownership remains with the Lessor.

The fair market value of the machine is $$60,000,$ and the estimated life span is ten years.

There is no purchase option on the lease.

The lease term is for seven years.

The annual payment of $$10,000$ is due on December $31$ each year.

The incremental borrowing rate is $6\%.$

Required:

Use the four$-$way test to determine if this is a capital lease or an operating lease.

For the lessee, record the journal entries required when the contract is signed, the first annual payment, and any required depreciation.

For the lessor, record the journal entries required when the lease is signed, and the receipt of the first annual payment.

The Dalton Co$.$ signed an agreement to lease a machine from the Evans Co$.$ on January $1,2023.$ The Dalton Co$.$ depreciates all machinery they own using the straight$-$line method. The terms of the agreement follow:

Ownership remains with the Lessor.

The fair market value of the machine is $$60,000,$ and the estimated life span is ten years.

There is no purchase option on the lease.

The lease term is for seven years.

The annual payment of $$10,000$ is due on December $31$ each year.

The incremental borrowing rate is $6\%.$

Required:

Use the four$-$way test to determine if this is a capital lease or an operating lease.

For the lessee, record the journal entries required when the contract is signed, the first annual payment, and any required depreciation.

For the lessor, record the journal entries required when the lease is signed, and the receipt of the first annual payment.