Assume a (hypothetical) company, Selnow Inc., owns a piece of machinery and enters into an agreement to lease the machinery on 1 January Year 1. In the lease contract, the company requires four annual payments of €28,679 starting on 1 January Year 1. The present value of the lease payments (using a 10 percent discount rate) is €100,000, and the fair value of the equipment is €90,000. The useful life of the machinery is four years and its salvage value is zero.

1. Is the lease a direct financing or sales-type lease?

2. What is Selnow’s income related to the lease in Year 1? In Year 2? Ignore taxes.