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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 |
| 170427 | |
| PV factor | 4.60478 |
| Annual rental payment | 37011 |
