Terry has traditionally purchased all of its manufacturing equipment. However, in Year 2 they were unable to find a vendor willing to sell them a new $750,000 machine. After some careful negotiations, however, they were able to lease the needed equipment for 5 years. At the end of the lease Terry will have the option to purchase the equipment for $110,000, the estimated fair value at the end of the lease. They plan to exercise the option and keep the equipment. The machine has an estimated economic life of 7 years with no salvage value. The payments on the lease will be $164,982. Terry does not know the implicit interest rate used by the vendor, but their incremental interest rate is 7%. The lease period began on June 1, Year 2. The first payment was due on that day. Subsequent payments will be made each year on May 31st. Terry has decided to keep all of its accumulated depreciation in one account rather than create a separate account for leased assets.

Make the appropriate journal entries, if any, to account for the lease including any necessary changes to income tax expense if the tax rate is 25%?