E$20\mathrm{.}13$B $($LO $2,4)($Lessee$-$Lessor Entries; Sales$-$Type Lease; Guaranteed Residual Value$)$

Flanigans Company leases a building to Wellington, Inc. on January $1,2025.$ The following facts pertain

to the lease agreement:

$1.$ The lease term is $6$ years, with equal annual rental payments of $$7,652$ 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 $$42,000,$ a book value to Flanigans of $$37,000,$ and a useful life of

$7$ years.

$4.$ At the end of the lease term, Flanigans and Wellington expect there to be an unguaranteed residual

value of $$3,000.$

$5.$ Flanigans wants to earn a return of $6\%$ on the lease, and collectibility of the payments is probable.

This rate is known by Wellington.

Instructions

$($Round all numbers to the nearest dollar.$)$

a$.$ How would Flanigans $($lessor$)$ and Wellington $($lessee$)$ classify this lease? How would Flanigans

initially measure the lease receivable, and how would Wellington initially measure the lease liabil$-$

ity and right$-$of$-$use asset?

b$.$ Using the original facts of the lease, show the journal entries to be made by both Flanigans and

Wellington in $2025.$

c$.$ Suppose the entire expected residual value of $$3,000$ is guaranteed by Wellington. How will this

change your answer to part $($a$)?$

d$.$ Assume the same facts as part $($c$),$ except the expected residual value is $$2,000.$ Does your answer

change?