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Lessee-Lessor Goring Dairy (lessee) leases its milking equipment from King Finance Company (lesor) under the following lease terms . 1.The lease term is 10 years,

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Lessee-Lessor Goring Dairy (lessee) leases its milking equipment from King Finance Company (lesor) under the following lease terms . 1.The lease term is 10 years, noncancelable, and requires equal rental payments of $30,300 due at the beginning of each year starting January 1, 2017 2. The equipment has a fair value at the commencement of the lease (lanuary 1,2017) of $242,741 and a cost of $180,000 on King Finance's books. It also has an estimated life of 15 years and an expected residual value of $45,000, though Goring Dairy has guaranteed a residual value of $50,000 to King Finance. 3.The lease contains no renewal options, and the equipment reverts to King Finance upon termination of the lease. The equipment is not of a specialized use. 4 Goring Dairy's incremental borrowing rate is 8% per year. The implicit rate is also 8% 5.Goring Dairy depreciates similar equipment that it owns on a straight-line basis. 6.Collectibility of the payments is probable. . . . N-10: i-8% 46319 7.24689 Present value $1 Present value of annuity due Present value of ordinary annuity 6.71008 Instructions (a) Evaluate the criteria for classification of the lease for the lessor and lessee, and describe the nature of the lease. o Popac l f h ouaaer e 2 4 2

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