Problem: Jacobsen Leasing Company leases a new machine that has a cost and fair value of $75,000 to Stadler Corporation on a 3-year noncancelable contract. Stadler Corporation agrees to assume all risks of normal ownership including such costs as insurance, taxes, and maintenance. The machine has a 3-year useful life and no residual value. The lease was signed on January 1, 2011. Jacobsen Leasing Company expects to earn a 9% return on its investment. The annual rentals are payable on each December 31.
Instructions:
Discuss the nature of the lease arrangement and the accounting method that each party to the lease should apply.