Direct Financing Lease

On January $1,$ Year $1,$ Stimpson Company leases non$-$specialized equipment with a fair value of $$115,000$ from Tomei Inc. The lease agreement specifies annual payments of $$20,000$ per year. Additional information pertaining to the lease is as follows:

The lease term is for $6$ years. Payments are due on January $1,$ beginning January Year $1.$

The annual payment is set by Tomei to earn a $8\%$ rate of return on its net investment. Stimpson is aware of this rate. Stimpson's incremental borrowing rate is $6\%.$

At the end of the $6-$year lease term, the machine is expected to be worth $$24,000.$ This residual value is not guaranteed by Stimpson. However, a third party provides a $$10,000$ residual value guarantee.

The equipment was purchased by Tomei for $$106,155\mathrm{.}90.$

The estimated useful life of the machine is $10$ years.

The collectability of all amounts due to the lessor is probable.

Required:

Question Content Area

$1.$ What is the proper classification of the lease for the lessor?

Criteria Met

Determination of Lease Classification

$1.$ Transfer of ownership at end of lease

$2.$ Bargain purchase option

$3.$ Lease term is for a major part of its economic life

$4.$ Present value of lease payments and any guaranteed residual value equals or exceeds substantially all of the fair value

$5.$ Specialized nature of the asset

Additional Lease Classification Criteria

$1.$ Present value of lease payments and any guaranteed residual value equals or exceeds substantially all of the fair value

$2.$ Probable that the lessor will collect the lease payments plus an amount to satisfy the residual value guarantee

Question Content Area

$2.$ Prepare the journal entries to be made by the lessor the first $2$ years. Round your answers to the nearest cent and use the rounded answer for the subsequent calculations.

Year $1$

Jan. $1$

Jan. $1$

Jan. $1$

Dec. $31$

Year $3$

Jan. $1$

Dec. $31$