Cullumber Company leases a building to Walsh, Inc. on January 1, 2020. The following facts pertain to the lease agreement. The lease term is 6 years, with equal annual rental payments of $3,938 at the beginning of each year. Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature. 1. 2. 3. 4. 5. The building has a fair value of $22,700, a book value to Cullumber of $15,700, and a useful life of 7 years. At the end of the lease term, Cullumber and Walsh expect there to be an unguaranteed residual value of $3,925. Cullumber wants to earn a return of 7% on the lease, and collectibility of the payments is probable. This rate is known by Walsh.

Leasing is a contractual arrangement in which someone (a lessee) pays the owner (or lessor) of a building, land, vehicle, or other asset for the use of that asset. The lease is the agreement between lessee and lessor.