On January 1, 2020, No. 1 Leasing Company leased equipment to Maria Corporation for a 5-year period ending December 31, 2024, at which time possession of the leased equipment will revert back to No. 1 Leasing Company. The lease is noncancelable. The lease terms do not provide for transfer of legal title, do not contain a bargain purchase option, and do not require the lessee to guarantee a residual value. Initial direct costs of negotiating and consummating the completed lease transaction incurred by No. 1 Leasing Company on January 1, 2020 were $10,000. The equipment, which has expected useful life of 5 years and expected residual value of $20,000, cost No. 1 Leasing Company $250,000 to manufacture. Its normal sales price was $320,000 on January 1, 2020. Equal payments under the lease are $69,689 and are due on January 1 of each year. The first payment was made on January 1, 2020. Collectability of the remaining lease payments is reasonably assured, and No. 1 Leasing Company has no material cost uncertainties. Maria’s incremental borrowing rate is 8%. Maria knows that the interest rate implicit in the leasing payments is 7%. Both companies use straight-line depreciation.

Required:

a). What is the nature of this lease to No. 1 Leasing Company (the lessor)? Explain.

b). Prepare the appropriate entries for No. 1 Leasing Company (the lessor) to record the lease and the lease payment at its inception. Show calculations.

c). Determine the total amount of lease-related income No. 1 Leasing Company (the lessor) will report for the year 2020.