Edom Company, the lessor, enters into a lease with Davis Company to lease equipment to Davis beginning January 1, Year 1. The lease terms, provisions, and related events are as follows: 1 The lease term is 5 years. The lease is noncancelable and requires annual rental receipts of $100,000 to be made in advance at the beginning of each year. 2 The equipment costs $313,000. The equipment has an estimated life of 6 years and, at the end of the lease term, has a residual value of $20,000 which is guaranteed by Davis Company (the lessee). 3 Davis agrees to pay all executory costs directly to a third party. 4 The interest rate implicit in the lease is 14%. 5 The initial direct costs are insignificant and assumed to be zero. 6 It is probable that Edom will collect the lease payments.