Oriole Incorporated leases a piece of machinery to Sheffield Company on January 1, 2020, under the following terms.
1. The lease is to be for 4 years with rental payments of $12,312 to be made at the beginning of each year.
2. The machinery’ has a fair value of $66,146, a book value of $49,360, and an economic life of 10 years.
3. At the end of the lease term, both parties expect the machinery to have a residual value of $24,680. To protect against a large loss, Oriole requests Sheffield to guarantee $17,260 of the residual value, which Sheffield agrees to do.
4. The lease does not transfer ownership at the end of the lease term, does not have any bargain purchase options, and the asset is not of a specialized nature.
5. The implicit rate is 5%, which is known by Sheffield.
6. Collectibility of the payments is probable.