On January 1st, 2006, SAS Company entered into lease where they agreed to make 5 annual payments of $224,000 beginning December 31st, 2006. They correctly computed that, PV of minimum lease payments was $894,000. Lease asset, high printing press, had fair market value of $1 million at 1/1/06. There was $1 purchase option so they knew lessor's implicit rate of 8%.  SAS treated this lease as the operating lease, even though they thought that $1 purchase option was really good deal.

SAS's auditors didn't even look at this lease last year. Though, at 12/31/07 their new auditors looked closely, and they told SAS that this must have been recorded as capital lease, as the purchase option was bargain.

Make entries which fix this error. SAS usually depreciated assets like printing presses over five years. Suppose that 12/31/07 books are still open.