Maco Inc. leased equipment to Pelican Co on January 1, 2020. The lease agreement calls for annual rental payments of $3,050 at the beginning of each year of the 3 year lease. The equipment has an economic useful life of 7 years, a fair value of $12,000, a book value of $5,000 and Maco expects a residual value of $4,000 at the end of the lease term (and 0 at the end of the assets life). Maco sets the lease payments with the intent of earning a 6 percent return. There is no bargain purchase price option, ownership does not change at the end of the lease term and the asset is not specialized in nature.

a. Assuming the residual value is not guaranteed, determine the lease type for the lessee. You must explain your answer.

b. Record the journal entry(ies) for the lessee for the first year and the subsequent leave payment on the first day of the following year. Date the journal entry(ies).

c. Record the first year of journal entries for the lessor d. How would the accounting for the lease change if the residual value is guaranteed? Both parties expect it to be $4,000.