Question

On January 1, 2020, Sunland Company leased equipment to Flynn Corporation. The following information pertains to this lease.

1.		The term of the non-cancelable lease is 6 years. At the end of the lease term, Flynn has the option to purchase the equipment for $2,000, while the expected residual value at the end of the lease is $6,000.
2.		Equal rental payments are due on January 1 of each year, beginning in 2020.
3.		The fair value of the equipment on January 1, 2020, is $180,000, and its cost is $150,000.
4.		The equipment has an economic life of 8 years. Flynn depreciates all of its equipment on a straight-line basis.
5.		Sunland set the annual rental to ensure a 5% rate of return. Flynn’s incremental borrowing rate is 6%, and the implicit rate of the lessor is unknown.
6.		Collectibility of lease payments by the lessor is probable.

(b) Calculate the amount of the annual rental payment. (Round answer to 0 decimal places, e.g. 5,275.)

Annual rental payment

$

Answer 1

Answer:

Fair value of leased asset = 180,000

Less: Present value of bargain-purchase option = [2000* 0.74622] = 1492

PV of lease payments = 180000 - 1492 = 178,508

Six annual lease payments = $178,508 ÷ 5.3294833494 = $ 33494

Therefore, annual rental payment = $ 33494

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