Lola Company leased equipment to Paco Company. The equipment cost the lessor $500,000 and has a useful life of six years. The appropriate interest rate for this lease is 8%. The annual lease payments are made at the beginning of each year. The lease term is for five years. The residual value at the end of the lease term is expected to be $50,000.

Paco Company has the option to purchase the equipment at that time for $20,000. Round your answers to the nearest whole dollar amounts.

Required:

A. For this lease:

1. The lease payment computed by the lessor is $____________________.

2. The amount the lessee should record as an asset is $________________.

3. What type of lease is for the lessee and lessor? (Explain)

B. How much interest (revenue or expense) should be recognized at the end of year 1, Year 2, and Year 3 by the:

Lessor (Lola Co.)

1. Lessee (Paco Co.)