A Lessor Leased Equipment to a Lessee on January 1

A lessor leased equipment to a lessee on January 1, 2014.The lease has the following characteristics: Book value of the asset to the lessor: $100,000
Market value: $167,417 on that date.
Lessor's implicit rate: 10% Lessee's borrowing rate: 12%
Lessee knows the lessor's implicit rate.
Five equal payments of $40,000 are due each January 1, beginning 2014 Lease term ends: December 31, 2018
Remaining useful life of equipment at January 1, 2014: 8 years (at the end of which time the equipment will have no residual value)
Estimated residual value on December 31, 2018: $30,000
Lessee has the option to buy the asset on December 31, 2018 for $1,000.
Assume there is no uncertainty as to payment of lease payments by lessee or unreimbursable costs fo lessor.
Assume straight-line depreciation or amortization.
(a)Is this an operating or finance lease for the lessee, and why?
(b)Prepare all the required journal entries for the lessor and lessee for 2014.

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