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Renewable Co. uses leasing as a secondary means of selling its products. The company contracted with...

Renewable Co. uses leasing as a secondary means of selling its products. The company contracted with Green Corporation to lease a machine with an economic life of 12 years to be used by Green Corporation in its operations. The fair value of the asset at the inception of the lease was $400,000; it cost Renewable Co. $360,000 and is carried as equipment at that value. Payments of $44,925 are to be made by Green Corporation at the beginning of each of the eight years of the lease. Renewable Co.’s implicit interest rate is 6% per year, which is not known by Green Corporation. Green Corporation’s incremental borrowing rate is 7%. Renewable Co. estimates the residual value of the leased asset to be $166,217 at the end of the lease term. The residual value is not guaranteed by Green Corporation. Renewable Co. will depreciate the equipment on a straight-line basis (assume no salvage value).

Required

a. How would Green Corporation classify the lease?

b. What balances (account titles, amounts) appear on Green’s balance sheet at the end of the first year, related to the lease?

c. What balances (account titles, amounts) appear on Green’s income statement for the first year, related to the lease?

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