Phelps Company leases a building to Walsh, 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 $4,703 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 $23,000, a book value to Phelps of $16,000, and a useful life of 6 years.4. At the end of the lease term, Phelps and Walsh expect there to be an unguaranteed residual value of $4,000.5. Phelps wants to earn a return of 8% on the lease, and collectibility of the payments is probable. This rate is known by Walsh. ### Lease Classification and Initial Measurement of Lease Receivable and Right-of-Use Asset**Question 1:**How would Phelps (lessor) and Walsh (lessee) classify this lease? How would Phelps initially measure the lease receivable, and how would Walsh initially measure the lease liability and right-of-use asset?*Answer:*_[Your detailed answer goes here]_**Question 2:**Suppose the entire expected residual value of $4,000 is guaranteed by Walsh. How will this change your answer to part a?*Answer:*_[Your detailed answer goes here]_---### Section: eTextbook and Media_[This section typically provides additional resources or media content, if available]_ ### Problem Statement**Assume the same facts as part c, except the expected residual value is $3,000. Does your answer change?****Response Section:**\[User Input Field\]### InstructionsEnter your response in the text box provided. Use the formatting options to structure your answer efficiently. This includes options for bold, italics, underline, and more advanced formatting tools to enhance the clarity and presentation of your solution.#### Formatting Tools- **Bold**: Highlight important points.- **Italic**: Emphasize specific terms or phrases.- **Underline**: Draw attention to key words.- **Lists**: Organize your response with bullet points or numbered lists.- **Indentation and Quotes**: Structure your argument or cite references.- **Equation Editor**: Include mathematical expressions if needed.### Additional ResourcesUse the "eTextbook and Media" section to reference your course materials. This area provides access to relevant textbooks and media that may help in understanding the problem and formulating your response.**Note:** This problem is part of a broader exercise. Ensure you are familiar with part c to provide an accurate revised answer considering the changed residual value of $3,000.

A lease can be defined as an agreement under which one party to the agreement agrees to rent a…

Answered: Phelps Company leases a building to…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Phelps Company leases a building to Walsh, 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 $4,703 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 $23,000, a book value to Phelps of $16,000, and a useful life of 6 years.
4.		At the end of the lease term, Phelps and Walsh expect there to be an unguaranteed residual value of $4,000.
5.		Phelps wants to earn a return of 8% on the lease, and collectibility of the payments is probable. This rate is known by Walsh.

### Lease Classification and Initial Measurement of Lease Receivable and Right-of-Use Asset

**Question 1:**
How would Phelps (lessor) and Walsh (lessee) classify this lease? How would Phelps initially measure the lease receivable, and how would Walsh initially measure the lease liability and right-of-use asset?

*Answer:*

_[Your detailed answer goes here]_

**Question 2:**
Suppose the entire expected residual value of $4,000 is guaranteed by Walsh. How will this change your answer to part a?

*Answer:*

_[Your detailed answer goes here]_

---

### Section: eTextbook and Media

_[This section typically provides additional resources or media content, if available]_

### Problem Statement

**Assume the same facts as part c, except the expected residual value is $3,000. Does your answer change?**

**Response Section:**

\[User Input Field\]

### Instructions
Enter your response in the text box provided. Use the formatting options to structure your answer efficiently. This includes options for bold, italics, underline, and more advanced formatting tools to enhance the clarity and presentation of your solution.

#### Formatting Tools
- **Bold**: Highlight important points.
- **Italic**: Emphasize specific terms or phrases.
- **Underline**: Draw attention to key words.
- **Lists**: Organize your response with bullet points or numbered lists.
- **Indentation and Quotes**: Structure your argument or cite references.
- **Equation Editor**: Include mathematical expressions if needed.

### Additional Resources
Use the "eTextbook and Media" section to reference your course materials. This area provides access to relevant textbooks and media that may help in understanding the problem and formulating your response.

**Note:** This problem is part of a broader exercise. Ensure you are familiar with part c to provide an accurate revised answer considering the changed residual value of $3,000.

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