On January 1, 2014, Raynick Ltd. purchased, and then leased, a building to Coos Co. The relevant information related to the lease is as follows:
a. The lease arrangement is for 10 years.
b. The leased building cost $3,045,000 and was purchased for cash on January 1, 2014.
c. The building is depreciated on a straight-line basis. Its estimated economic life is 40 years.
d. Lease payments are $167,000 per year and are made at the beginning of the year.
e. Property tax of $5,200 was paid to Athens County on March 2, 2014 and $6,400 in insurance premiums on the building were paid to Matthews Insurance Co. on January 4, 2014.
f. Both the lessor and lessee are on a calendar year basis.
Required:
1. Is this a capital lease or an operating lease? Explain briefly. Note that you have all the information you need to determine this.
2. Prepare the journal entry(s) that Raynick Ltd. should make in 2014.
3. Prepare the journal entry(s) that Coos Co. should make in 2014.