Watt Financing leased a packing machine to Nuts Company. The noncancelable lease requires lease payments of $50,000 per year, payable in advance, over a five-year period. Watts implicit interest rate (known to Nuts) is 11 percent. The lease term begins on January 1, 2019. The machines economic life is 10 years with a cost of $200,000 and fair value of $235,000. The collectability of the lease payments is probable for the lessor.

Instructions

1. Assuming that there is a guaranteed residual value of $20,000 to Watt, provide the journal entries required on both Watt's and Nuts' books through December 31, 2020.

2. What type of lease this is if the residual value of $20,000 is NOT guaranteed?