The following information as at the year-end date is extracted from the Freddy Corporation's financial statements:

December 31

2019 ($) 2018 ($)

Cash 95,000 27,000

Accounts receivable 92,000 80,000

Allowance for doubtful accounts (4,500) (3,100)

Inventory 155,000 175,000

Prepaid expenses 7,500 6,800

Land 90,000 60,000

Buildings 287,000 244,000

Buildings - Accumulated depreciation (32,000) (13,000)

Machinery 50,000 60,000

Machinery- Accumulated depreciation (30,000) (25,000)

Leased equipment* 28,594 -

Leased equipment - Accumulated depreciation (9,531) -

729,063 611,700

Accounts payable 90,000 84,000

Accrued liabilities 54,000 63,000

Lease payable 18,594 -

Interest payable 930 -

Bonds payable 125,000 60,000

Share capital-ordinary 100,000 92,000

Retained earnings 340,539 312,700

729,063 611,700

For the year 2019

Net income $47,839

Depreciation expense -

Buildings 19,000

Depreciation expense -

Machinery 5,000

Depreciation expense -

Leased equipment 9,531

Cash dividends declared and paid 20,000

Gain or loss on sale of Machinery None

Additional information:

* On 1 January 2019, Freddy leased an equipment, with an economic useful life of ten years, from Flower Company for three years. The present value of the minimum lease payment and the fair value of the leased equipment were $28,594 and $95,313 respectively. Annual lease payment of $10,000 has to be made at the beginning of each period. The lease agreement offers Freddy an option of purchasing the leased equipment at $1 at the end of the lease period.

Required:

(a) With reference to each of the five classification criteria, discuss why the leased equipment should be classified as the "finance lease", instead of the "operating lease", in the books of Freddy.

(b) Amend a Statement of Cash Flows for the year ended 31 December 2019 for Freddy Corporation using the indirect method (assuming dividends and interest paid are classified as financing activities).

(c) Goods, which costs $1,500, were not included in the physical count of inventory by Freddy. They were shipped from a supplier FOB shipping point on 29 December 2019, and did not arrive until 3 January 2020. Assuming that the purchase was properly recorded while the omission of the inventory could only be discovered after the 2019 financial statements were issued,

i. analyze the effect (over/understate) of this omission on 2019 costs of goods sold, net income and retained earnings, and

ii. prepare the adjusting entries accordingly.