Reference no: EM133127077

Question - Ivanhoe Company leases a building to Metlock, Inc. on January 1, 2020. The following facts pertain to the lease agreement.

1. The lease term is 5 years, with equal annual rental payments of $3,163 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 $15,000, a book value to Ivanhoe of $8,000, and a useful life of 6 years.

4. At the end of the lease term, Ivanhoe and Metlock expect there to be an unguaranteed residual value of $2,000.

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

Required -

How would Ivanhoe (lessor) and Metlock (lessee) classify this lease?

How would Ivanhoe initially measure the lease receivable, and how would Metlock initially measure the lease liability and right-of-use asset?