The following facts pertain to a lease between Star Bank Leasing (lessor) and JKL Printers (Lessee) for a piece of equipment:

1. The lease is for a four-year term, beginning on January 1, 2021. The economic life of the asset is four years.
2. The lessor's implicit interest rate is 7%; the lessees incremental borrowing rate is 7%.
3. The fair value of the Equipment is $140,000. The cost of the equipment to the lessor is $140,000.
4. The annual lease payment is $40,027.98; the first payment is due on January 1, 2021. The amount includes $1,400 for executory costs.
5. Title to equipment automatically transfers to the lessee at the end of the lease term. The asset is expected to have a residual value of $ 11,000 at the end of its useful life.
6. Both the lessee and the lessor use the calendar year for their accounting periods and prepare financial statements in accordance with ASPE.

Instructions

1. Identify the lease type from the standpoint of the JKL Printers Books (lessee).
2. Prepare the journal entry to record the inception of the lease on the lessees books.
3. Prepare the journal entries on JKL Printers books to record the first payments and expenses related to this lease for the years 2021 as well as any adjusting journal entries at its fiscal year ends of December 31, 2021