Current Attempt in Progress

Phelps Company leases a building to Walsh, Inc. on January $1,2025.$ The following facts pertain to the lease agreement.

The lease term is $5$ years, with equal annual rental payments of $$4,703$ at the beginning of each year.

Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature.

The building has a fair value of $$23,000,$ a book value to Phelps of $$16,000,$ and a useful life of $6$ years.

At the end of the lease term, Phelps and Walsh expect there to be an unguaranteed residual value of $$4,000.$

Phelps wants to earn a return of $8\%$ on the lease, and collectibility of the payments is probable. Walsh was unaware of the implicit rate used in the lease by Phelps and has an incremental borrowing rate of $9\%.$

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How would Phelps $($lessor$)$ and Walsh $($lessee$)$ classify this lease?

Phelps would classify the lease as a lease.