Chapter 20, Problem 11E

Guaranteed and Unguaranteed Residual Values Grygiel Company leases a nonspecialized machine with a lair value of $50,000 to Baker Company. The lease has a life of 6 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 a major part of the expected economic life of the machine. It is probable that Grygiel will collect the lease payments plus any amount necessary to satisfy a residual value guarantee. Round your answers to the nearest dollar.

Required:

1. 1. Next Level If the interest rate implicit in the lease is 10%, compute the machine’s expected residual value.
2. 2. Next Level If the residual value is guaranteed by Baker, how would each company classify the lease?
3. 3. Next Level If the residual value is not guaranteed by Baker but is instead guaranteed by a third party, how would each company classify the lease?