Carl Leasing, Inc. agrees to lease medical equipment to Sally, Inc. on January 1, 2012. They agree on the following terms.

1) The normal selling price of the medical equipment is $260,000 and the cost of the asset to Carl Leasing, Inc. was $135,000.

2) Sally, Inc. will pay all maintenance, insurance, and tax costs directly and annual payments of $35,000 on January 1 each year.

3) The lease begins on January 1, 2012, and payments will be in equal annual installments.

4) The lease is noncancelable with no renewal option. The lease term is 10 years (the same as the estimated economic life).

5) At the end of the lease, the medical equipment will revert to Carl Leasing, Inc. and have an unguaranteed residual value of $20,000. Their implicit interest rate is 10%.

6) Carl Leasing, Inc. incurred costs of $6,500 in negotiating and closing the lease. There are no uncertainties regarding additional costs yet to be incurred and the collectability of the lease payments is reasonably predictable.

Required:

a) Determine what type of lease this would be for the lessee and find out the initial obligation.

b) Prepare all the journal entries for Sally, Inc. for 2012. Assume a calendar year fiscal year.