Pharoah Incorporated leases a piece of machinery to Flounder Company on January $1,2025,$ under the following terms.

The lease is to be for $4$ years with rental payments of $$11,651$ to be made at the beginning of each year.

The machinery has a fair value of $$61,964,$ a book value of $$46,240,$ and an economic life of $10$ years.

At the end of the lease term, both parties expect the machinery to have a residual value of $$23,120.$ To protect against a large

loss, Pharoah requests Flounder to guarantee $$16,090$ of the residual value, which Flounder agrees to do$.$

The lease does not transfer ownership at the end of the lease term, does not have any bargain purchase options, and the asset

is not of a specialized nature.

The implicit rate is $5\%,$ which is known by Flounder.

Collectibility of the payments is probable.

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Evaluate the criteria for classification of the lease, and describe the nature of the lease.

For the lessee, it is a

$,$ and for the lessor, it is a

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