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Widget Corporation (Widget) manufactures equipment with an estimated economic life of 11 years. On May 30, 2020, Widget leases it to Gadget Corporation (Gadget) for
Widget Corporation ("Widget") manufactures equipment with an estimated economic life of 11 years. On May 30, 2020, Widget leases it to Gadget Corporation ("Gadget") for a period of 10 years. Details of the lease are as follows: Equipment has a fair value and cost at the inception of the lease: $185,078. Guaranteed residual value: $20,000. Annual lease payment, due at beginning of each year: $25,250. Lease contains no renewal options and the equipment reverts to Widget at the end of the lease. Gadget's incremental interest rate, as well as implicit rate is 9%. Gadget uses straight-line amortization for similar equipment that it owns. Widget has determined that collectibility of lease payments is reasonably predictable and that no additional costs will be incurred. Required: 1. Identify the lease criteria. 2. How the lessee and lessor should account for the lease transaction. Assume both companies follow ASPE
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