Question

Windsor Leasing Company signs an agreement on January 1, 2020, to lease equipment to Cole Company. The following information relates to this agreement.

1.

The term of the non-cancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years.

2.

The cost of the asset to the lessor is $451,000. The fair value of the asset at January 1, 2020, is $451,000.

3.

The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $24,225, none of which is guaranteed.

4.

The agreement requires equal annual rental payments, beginning on January 1, 2020.

5.

Collectibility of the lease payments by Windsor is probable.

Assuming the lessor desires a 6% rate of return on its investment, calculate the amount of the annual rental payment required. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and the final answer to 0 decimal places e.g. 5,275.)

Amount of the annual rental payment

$enter the Amount of the annual rental payment in dollars

Answer 1

Answer
Residual value	$           24,225
PV of single sum (i=6%, n=6)	0.70496054	1/1.06^6
PV of residual value	$           17,078
Fair market value of leased equipment	$         451,000
Present value of residual value	-$           17,078
Amount to be recovered through lease payment	$         433,922
PV factor of annuity due	5.212363
Annual payment required	$           83,249	433922/5.212363