Guaranteed and Unguaranteed Residual Values

Grygiel Company leases a nonspecialized machine with a fair value of $80,000 to Baker Company. The lease has a life of 6 years and requires a $12,000 payment at the end of each year. The lease does not include a transfer of ownership nor a bargain purchase option, and the life of the lease is less than a major part of the expected economic life of the machine. It is probable that Grygiel will collect the lease payments plus any amount necessary to satisfy a residual value guarantee. Round intermediate and final answers to the nearest dollar.

(Click here to access the PV and FV tables to use with this problem.)

Required:

1. If the interest rate implicit in the lease is 10%, compute the machines expected residual value. $fill in the blank 1 2. If the residual value is guaranteed by Baker, how would each company classify the lease?

Baker Company (Lessee):

financing leaseoperating lease

Grygiel Company (Lessor):

operating leasedirect financing leasesales-type lease

3. If the residual value is not guaranteed by Baker but is instead guaranteed by a third party, how would each company classify the lease?

Baker Company (Lessee):

financing leaseoperating lease

Grygiel Company (Lessor):

operating leasedirect financing leasesales-type lease