Lexington Leasing Company $($Lessor$)$ agrees to lease equipment to Nicholasville Construction $($Lessee$)$ on January $1,2025.$ The

following information relates to the lease agreement.

$($a$)$ The term of the lease is $7$ years with no renewal option, and the machinery has an estimated economic life of $9$ years.

$($b$)$ The cost of the machinery is $$653,420,$ and the fair value of the asset on January $1,2025,$ is $$887,406.$

$($c$)$ At the end of the lease term, the asset reverts to the lessor and has an unguaranteed residual value of $$100,000.$ Nicholasville

amortizes all of its leased equipment on a straight$-$line basis.

$($d$)$ The lease agreement requires equal annual rental payments, beginning on January $1,2025.$

$($e$)$ The collectability of the lease payments is probable.

$($f$)$ Lexington desires an $10\%$ rate of return on its investments. Nicholasville's incremental borrowing rate is $11\%,$ and the

lessor's implicit rate is unknown to Nicholasville.

$4$ Part $1(3$ points$)$: Lessor Accounting

Calculate the amount of the annual rental payment required by Lessor including the fixed insurance payment.

Show your supporting computations or financial calculator keystrokes.

What type of leases is this for Lessor $($check all $5$ tests$)?$ Prepare journal entries for Lessor in $2025$ and $2026.$

Show your supporting computations. Hint: Lessor needs to subtract PV of unguaranteed residual value from

Sales revenue and Cost of goods sold. See Solutions to WileyPlus$7$Ch$20$ Question $3($Exercise $20\mathrm{.}5),$ Question $4$

$($Exercise $20\mathrm{.}6),$ and Question $6($Exercise $20\mathrm{.}13$b$).$

Part $2(2$ points$)$: Lessee Accounting $($continued from previous page$)$

Required: Prepare journal entries for Lessee in $2025$ and $2026.$ Show your supporting computations or

keystrokes.

ASSUMING this lease were an operating lease.

Part $3(2$ points$)$: Lessor Accounting $($assuming an operating lease$)$

Required: The salvage value of the asset is $$5,000.$ Prepare journal entries for Lessor in $2025$ and $2026.$

Part $4(3$ points$)$: Lessee Accounting $($assuming an operating lease$)$

Required: Prepare journal entries for Lessee in $2025$ and $2026.$