Problem:
On January 2, 2023, Sent entered into a 10-year non-cancelable lease with Love for equipment. Facts: ? The equipment has an estimated useful life of 13 years. ? There is no purchase option. Transfer of ownership to Senft is not stipulated in the lease contract. / Fair value at inception of lease was $1,115,000. ‹ Sent's incremental borrowing rate is 10%. The implicit annual rate in the lease (known to Senft) is 8%. ‹ Senft and Love use straight-line depreciation. ? The lease requires rental payments of $70,000, payable on 1/2/23 and subsequently on 6/30 and 12/31. ? The guaranteed residual value by Sent is the expected salvage value of $40,000. a. What kind of lease is this to Senft, the lessee (operating or finance)? Discuss each lease classification criteria b. What kind of lease is this for the Love (lessor)? Discuss each lease classification criteria.