On January 1, Lessor Company leases equipment to Lessee Company. The lease term is 8 years; the economic life of the asset is 12 years. The cost of the equipment is $36,000; its fair value is $61,000. Lessors implicit rate is 7%; Lessees incremental borrowing rate is 7%. Lease payments of $9000 are due at the beginning of each year (PV $57,510). At the end of the lease term, the asset is expected to have a residual value of $6000 (PV $3492), none of which is guaranteed by Lessee.

1. Which of the following is true?

1. CGS for Lessor is $36,000.
2. Sales revenue for Lessor is $61,000.
3. Interest expense for Lessee at the end of the first year is the beginning liability times 7%.
4. Interest expense for Lessee at the end of the first year is the ending liability times 7%.

2. If instead of an unguaranteed residual value, there is a purchase option which is so low that it is expected Lessee will exercise it then

1. Lessee adds the present value of the option as an additional payment to be made, but Lessor does not add it into the receivable.
2. Both parties add in the present value of the option to the liability or receivable.
3. Lessor adds the present value of the option as an additional payment to be received, but Lessee does not add it into the liability.
4. Neither party considers the present value of the option for the liability or receivable.