Reference no: EM132645206

Lessor enters into a four-year lease of equipment with Lessee. Lessor sells and leases the equipment, which is not specialized in nature and is expected to have an alternative use to Lessor at the end of the four-year lease term. Under the lease:

1. Lessor receives annual lease payments of $30,000, payable at lease commencement and annually at the lease anniversary date thereafter.
2. Lessor expects the residual value of the equipment to be $100,000 at the end of the five-year lease term.
3. Lessee does not provide an RVG.
4. The equipment has an estimated remaining economic life of 12 years, a carrying amount of $160,000 and a fair value of $170,000.
5. Lessor incurred costs of $2,000 for a broker's commission as a result of obtaining the lease. These costs qualify as initial direct costs and are capitalized when the lease is obtained.
6. The lease does not transfer ownership of the underlying asset to Lessee at the end of the lease term or contain an option for Lessee to purchase the equipment.
7. At lease commencement, Lessor concludes that it is probable that it will collect the lease payments.

Problem 1: How should Lessor classify this lease?

Problem 2: Make the journal entries at the time of the lease commencement and for Years 1 and 2 of the lease term.