Washington Company (lessor) agrees to lease equipment to Lincoln Company (lessee) on January 1, 2017, on a noncancelable lease.The following information relates to the lease agreement.

The term of the lease is 10 years with no renewal option and no bargain purchase option.The equipment is expected to have an economic life of 12 years.

The cost of the equipment is $960,000, and the fair value of the asset on January 1, 2017, is $960,000.

At the end of the lease term, the equipment reverts to the lessor.

The equipment has an unguaranteed residual value of $100,000.

Lincoln depreciates all of its equipment on a straight-line basis.

The lease agreement requires equal annual rental payments, beginning January 1, 2017.

The collectability of the lease payments is reasonably predictable.

There are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.

Washington desires a 10% rate of return on its investments.Lincoln's incremental borrowing rate is 12%.The lessor's implicit rate is unknown.

Instructions:

What type of lease is this to Washington?Why?

What type of lease is this to Lincoln?Why?

Calculate the amount of the annual rental payment required by the lease.

Prepare journal entries for Washington for 2017.

Prepare the journal entry or entries for Lincoln for 2017.