Walker Power Washing Services, Inc. leases nonspecialized equipment from McCoy Equipment. The lease term is 3 years with no renewal or purchase options, and title to the underlying asset is retained by the lessor at the end of the lease term. The lease requires annual fixed rental payments of $25,200 per year on July 1 of each year. The first payment occurs on July 1, 2022, at the lease commencement. The fair value of the equipment is $108,000 and had a carrying amount on McCoy’s books of $86,400. The equipment has a remaining life of 6 years. The estimated residual value of the equipment is $41,610. The lessee does not guarantee the residual value, but McCoy secured an unrelated third party guarantee of $30,000, and the collection of this guaranteed residual is probable. The rate implicit in the lease is 5%. McCoy’s fiscal year ends on December 31. There are no prepaid rentals, and neither party to the agreement pays initial direct costs.

Required

a. Classify this lease for the lessor, McCoy Equipment.

b. Provide all journal entries for the lessor for 2022 and 2023. Show all supporting computations.