Phelps Company leases a building to Walsh, Inc. on January 1, 2017. The following facts pertain to the lease agreement.

1.

The lease term is 5 years, with equal annual rental payments of $5,333.79 beginning on January 1, 2017 and then

on December 31 from 2017 through 2020.

2.

Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of

a specialized nature.

3.

The building has a fair value of $23,000, a cost to Phelps of $23,000, and a useful life of 5 years.

4.

Phelps wants to earn a return of 8% on the lease, and collectibility of the payments is probable. This rate is known

by Walsh.

Instructions

(a)

How would Phelps (lessor) and Walsh (lessee) classify this lease (give reasons for your answer)? How would Phelps

initially measure the lease receivable, and how would Walsh initially measure the lease liability and right-of-use

asset?

(b)

Prepare the amortization table for Phelps and Walsh.

(c)

Show the journal entries to be made by both Phelps and Walsh in 2017 and 2018.