Reference no: EM132892333

Cullumber Company leases a building to Marin, Inc. on January 1, 2020. The following facts pertain to the lease agreement.

1. The lease term is 4 years, with equal annual rental payments of $3,554 at the beginning of each year.

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 $14,000, a book value to Cullumber of $7,000, and a useful life of 5 years.

4. At the end of the lease term, Cullumber and Marin expect there to be an unguaranteed residual value of $1,750.

5. Cullumber wants to earn a return of 8% on the lease, and collectibility of the payments is probable. Marin was unaware of the implicit rate used in the lease by Cullumber and has an incremental borrowing rate of 9%.

Problem 1: How would Cullumber (lessor) and Marin (lessee) classify this lease? Marin would classify the lease as what kind of Lease?

Problem 2: How would Cullumber initially measure the lease receivable, and how would Marin initially measure the lease liability and right-of-use asset?