Operating Lease for Lessor

Lessor Sales Company and Lessee Manufacturing agreed to a noncancelable lease. The following information is available to both entities regarding the lease terms and the underlying asset. 1. Lessor's cost of the underlying asset was $30,000. The asset was new at the inception of the lease term. 2. Lease term is three years starting January 1 of Year 1. 3. Estimated useful life of the underlying asset is six years. Estimated residual value at end of six years is zero. 4. On January 1 of Year 4, the estimated unguaranteed residual value of the underlying asset one day after the end of the lease term is $10,000. 5. Lessor's implicit rate is 7%. 6. Lessee's incremental borrowing rate on January 1 of Year 1 is 8% and the lessee is unaware of the lessor's implicit rate. 7. Title to the underlying asset is retained by the lessor at the end of the lease term. 8. The fair value of the underlying asset on January 1 of Year 1 is $45,000. 9. Annual lease payments are due each January 1 with the first payment due at the inception of the lease. 10. The accounting period for the lessor and the lessee ends on December 31 . Required a. Compute the annual lease payment calculated by the lessor. b. Determine the lease classification for the lessor. d. Provide journal entries for the lessor on January 1 and December 31 of Year 1 and Year 2