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2) On 1/1/2005, JK Inc. (lessee) and EQ, Inc. entered into a non-cancelable lease that d oes not transfer title and does not contain a purchase option. The lease covers 3 years of the equipment's 5-year economic life. The annual rental payments of $40,000 include executory costs of 3,500 and are due at the beginning of each of the three years. Estimated residual value is 4,300. The asset will be returned to the lessor on 12/31/2007. Additional information: Fair value of the leased property on 1/1/05: $107,000 Estimated economic life of the property as of 1/1/05: 5 years Cost of the equipment for the lessor: 93,500 Lessee's incremental borrowing rate equals or exceeds the lessor's implicit rate and implicit rate in the lease is 8%. Collectibility is reasonably assured and the lessor has substantially completed performance. Requirement 1: Calculate the PVMLP under the following alternative situations: a) Lessee guarantees the $4,300 residual value. PVMLP = b) Lessee does NOT guarantee the $4,300 residual value. PVMLP Requirement 2: Determine accounting classification under the following alternative situations: a) Lessee guarantees the $4,300 residual value. an Operating or a Capital lease b) Lessee does NOT guarantee the $4,300 residual value. an Operating or a Capital lease

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