Phelps Company leases a building to Walsh, Inc. on January $1,2025.$ The following facts pertain to the lease agreement.

The lease term is $5$ years, with equal annual rental payments of $$4,703$ at the beginning of each year.

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.

The building has a fair value of $$23,000,$ a book value to Phelps of $$16,000,$ and a useful life of $6$ years.

At the end of the lease term, Phelps and Walsh expect there to be an unguarahteed residual value of $$4,000.$

Phelps wants to earn a return of $8\%$ on the lease, and collectibility of the payments is probable. Walsh was unawa of the implicit rate used in the lease by Phelps and has an incremental borrowing rate of $9\%.$

Click here to view factor tables.

How would Phelps $($lessor$)$ and Walsh $($lessee$)$ classify this lease?

Phelps would classify the lease as a lease.

Walsh would classify the lease as a lease.

How would Phelps initially measure the lease receivable, and how would Walsh initially measure the lease liability and right$-$of$-$use asset? $($For calculation purposes, use $5$ decimal places as displayed in the factor table provided and round final answers to $0$ decimal places, e$.$g$.5,275.)$

Phelps

Lease receivable

$

Present value of rental payments $

Walsh

Lease liability$/$Right$-$of$-$use asset

$