=+3. Assume the following facts concerning a sales-type lease:

The lease term is three years and qualifies as a capital lease for both lessor and lessee. The asset reverts to the lessor at the end of the lease term. Assume straight-line depreciation by the lessee.

Payments are $50,000 at the beginning of each year, plus a guaran-

teed residual value of $10,000 at the end of the lease term. The les-

sor estimates a total residual value of $15,000. Lease payments include $4,000 for executory costs under a maintenance agreement.

Initial direct costs associated with the lease are $2,700, Cash sales price of the asset is $137,102.50. Lessor's manufacturing cost is $100,000.

The lessee does not know the lessor's implicit rate, but its own incremental borrowing rate is 11 percent.

Required:
a.
Prepare the accounting entries for both lessor and lessee for the three years. What happens in Year 3 if residual value is only $8,000?