Question

On January 1, 2017 Baggins Co. leases gardening equipment to Gamgee Inc. The details are as follows: The lease has a non-cancelable term of 6 years. Ownership is not transferred, there is no purchase option, and the asset is not specialized in nature. Collectability of payments is probable. The core has a fair value of $245,000, a book value of $200,000, a useful life of 9 years, and a salvage value of $4,000. At the end of the lease term, Baggins expects the core to be worth $24,335. None of the equipment’s residual value has been guaranteed by Gamgee. Based on assessed risk Baggins has priced an 8% rate of return into the lease. Gamgee’s incremental borrowing rate is 9%. Equal payments are due at the beginning of each year. Both firms have December 31st fiscal year ends.

Determine the payments Baggins will set for the lease. Classify this lease for Baggins. Prepare Baggins’ amortization table.

Answer 1