Lessor Accounting for Operating Lease with Payments Made at End of Year

On January $1,$ Year $1,$ Hawk Corp. signs a contract to lease non$-$specialized manufacturing equipment from Falcon, Inc. Hawk agrees to make lease payments of $$36,000$ per year. Additional information pertaining to the lease is as follows:

The term of the noncancelable lease is $4$ years. Payments are due every December $31,$ beginning December $31,$ Year $1.$ Falcon expects to collect all lease payments.

The fair value of the manufacturing equipment on January $1,$ Year $1,$ is $$150,000.$ The equipment has an economic life of $7$ years.

The equipment has an estimated residual value of $$15,000$ at the end of the lease term. This amount is not guaranteed by Hawk.

Both Hawk and Falcon depreciate similar assets using the straight$-$line method.

Hawk's incremental borrowing rate is $8\%$ per year; Falcon's implicit interest rate is $6\%$ and known by Hawk.

Hawk pays $$1,100$ per year for maintenance of the equipment directly to an applicable third party.

Required:

Examine and evaluate the lease classification criteria.

Criteria

Met

Determination of Lease Classification

Transfer of ownership at end of lease

Bargain purchase option

Lease term is for a major part of its economic life

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

Specialized nature of the asset

Additional Lease Classification Criteria

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

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

Determine what type of lease this is for Falcon.

Prepare journal entries for Falcon $($the lessor$)$ for the entire lease period. Assume that the equipment has a fair value of $$11,500$ at the end of the $4-$ year lease term. Round your answers to the nearest cent and use the rounded answer for the subsequent calculations.

Year $1$

Jan. $1$

Dec. $31$

Dec. $31$

Year $2$

Dec. $31$

Dec. $31$

Year $3$

Dec. $31$

Dec. $31$