Question & Answer: leased equipment to Ivanhoe Corporation. The following infor…..

Exercise 21-7

On January 1, 2017, Sarasota Company leased equipment to Ivanhoe Corporation. The following information pertains to this lease.

1. The term of the noncancelable lease is 6 years, with no renewal option. The equipment reverts to the lessor at the termination of the lease.
2. Equal rental payments are due on January 1 of each year, beginning in 2017.
3. The fair value of the equipment on January 1, 2017, is $176,000, and its cost is $140,800.
4. The equipment has an economic life of 8 years, with an unguaranteed residual value of $11,000. Ivanhoe depreciates all of its equipment on a straight-line basis.
5. Sarasota set the annual rental to ensure an 12% rate of return. Ivanhoe’s incremental borrowing rate is 13%, and the implicit rate of the lessor is unknown.
6. Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by the lessor.

(Both the lessor and the lessee’s accounting period ends on December 31.)

Calculate the amount of the annual rental payment.

Expert Answer


Fair value of equipment 176000
Less: Present value of unguaranteed residual value -5573
PV factor 4.60478
Annual rental payment 37011
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