On January 1, 2011, ABC Company leased a copier from XYZ. The four-year lease agreement specifies annual payments of $100,000 beginning January 1, 2011, the inception of the lease, and at each January 1 thereafter through 2014. The useful life of the copier is estimated to be ten years. Before deciding to lease, ABC considered purchasing a copier for its cash price of $479,079. If funds were borrowed to buy the copier, the interest rate would have been 10%. ABC Company paid a commission of $4,000 to arrange this lease.
a) How would this lease be classified? Explain your answer.
b) Prepare the journal entries on January 1 and December 31, for ABC Company for 2011, 2012 and 2013.