On January 1, 2017, Sarasota Company leased equipment to Ivanhoe Corporation. The following information pertains to this lease.
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Question & Answer: leased equipment to Ivanhoe Corporation. The following infor…..
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|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.
|Fair value of equipment||176000|
|Less: Present value of unguaranteed residual value||-5573|
|Annual rental payment||37011|