Determining Type of Lease and Subsequent Accounting On January 1, 2019, Alice Company leases nonspecialized equipment for 5 years, agreeing to pay $65,000 annually at the beginning of each year under the noncancelable lease. Superior Equipment Company, the lessor, agrees to remit all executory costs, estimated to be $3,450 per year. The cost of the equipment is $275,000 and the fair value of the equipment is $305,000. Its estimated life is 10 years. The estimated residual value at the end of 5 years is $75,000 and is not guaranteed by Alice; at the end of 10 years, it is $5,000. There is no bargain purchase option in the lease or any agreement to transfer ownership at the end of the lease to the lessee. The implicit interest rate is 12%. On October 1 of each war, Superior Equipment pays property taxes of $650, maintenance costs of $1,600, and insurance of $1,200. Due to recent cash flow problems, Superior believes that Alice may not be able to make all of the required lease payments. Straight-line depreciation is considered the appropriate method by both companies.
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