The Grygiel Company leases a machine with a fair value of $50,000 to the Baker Company. The lease has a life of six years and requires a $10,000 payment at the end of each year. The lease does not include a transfer of ownership, nor a bargain purchase option, and the life of the lease is less than 75% of the expected economic life of the machine. The collectibility of the lease payments is reasonably assured, and there are no uncertainties involved in the lease.

Required

1. If Grygiel requires a return of 10%, compute the expected residual value of the machine.

2. If the residual value is guaranteed by the Baker Company, how would each company classify the lease?

3. If the residual value is not guaranteed by the Baker Company, how would each company classify the lease?