E$21\mathrm{.}13($LO$2,4)($Lessee$-$LessorEntries; Sales$-$Type Lease; Guaranteed Residual Value$)$ Phelps

Company leases a building to Walsh, Inc. on January $1,2020.$ 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 $6$ year

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

$$4,000.$

Phelps wants to eam a return of $8\%$ on the lease, and collectibility of the payments is probable. This

rate is known by Walsh.

Instructions

a$.$ How would Phelps$($lessor$)$ and Walsh $($lessee$)$ classify this lease? How would Phelps initially measure

the lease receivable, and bow would Walsh initially measure the lease liability and right$-$of$-$use asser?

b$.$ Using the original facts of the lease, show the journal entries to be made by both Phelps and Walsh

in $2020.$

c$.$ Suppose the entire expected residual value of $$4,000$ is guaranteed by Walsh. How will this change

your answer to part a$?$

d$.$ Assume the same facts as part c$,$ except the expected residual value is $$3,000.$ Does your ansutr

change?