Big Corporation enters into a 6-year lease of equipment with Tiny Company, receiving  annual lease payments of $9,500, payable at the end of each year. Tiny provides a residual  value guarantee of $13,000. The equipment has a 9-year estimated remaining economic life,  a carrying amount of $54,000, and a fair value of $62,000 at the commencement date. Big expects the residual value of the equipment to be $20,000 at the end of the 6-year lease  term. The lease does not transfer ownership of the underlying asset to Tiny or contain an  option for Tiny to purchase the underlying asset. Big incurs $2,000 in initial direct costs in  connection with obtaining the lease, and no amounts are prepaid by Tiny to Big. The rate  implicit in the lease is 5.5 percent. However, Big Corporation has serious concerns as to the  collectability of the lease as the lessee intends to make the lease payments primarily from  income from the business in which the equipment will be used. There is considerable  competition in the industry and Tiny Company has limited experience. b. At the end of year 1, Tiny makes the first payment, but it is still not probable that all  payments will be collected. How is this payment recorded?  c. At the end of year 4, Tiny makes the annual payment and collectability on the  remainder of the lease is now likely. How should Big record this transaction?

Big Corporation enters into a 6-year lease of equipment with Tiny Company, receiving 
annual lease payments of $9,500, payable at the end of each year. Tiny provides a residual 
value guarantee of $13,000. The equipment has a 9-year estimated remaining economic life, 
a carrying amount of $54,000, and a fair value of $62,000 at the commencement date. Big
expects the residual value of the equipment to be $20,000 at the end of the 6-year lease 
term. The lease does not transfer ownership of the underlying asset to Tiny or contain an 
option for Tiny to purchase the underlying asset. Big incurs $2,000 in initial direct costs in 
connection with obtaining the lease, and no amounts are prepaid by Tiny to Big. The rate 
implicit in the lease is 5.5 percent. However, Big Corporation has serious concerns as to the 
collectability of the lease as the lessee intends to make the lease payments primarily from 
income from the business in which the equipment will be used. There is considerable 
competition in the industry and Tiny Company has limited experience.

b. At the end of year 1, Tiny makes the first payment, but it is still not probable that all 
payments will be collected. How is this payment recorded? 

c. At the end of year 4, Tiny makes the annual payment and collectability on the 
remainder of the lease is now likely. How should Big record this transaction?