Question

On January 1, 2017, Tamarisk Company leased equipment to Vaughn 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 $184,000, and its cost is $147,200.
4.		The equipment has an economic life of 8 years, with an unguaranteed residual value of $8,000. Vaughn depreciates all of its equipment on a straight-line basis.
5.		Tamarisk set the annual rental to ensure an 12% rate of return. Vaughn’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.)

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Calculate the amount of the annual rental payment. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

The amount of the annual rental payment

$enter the amount of the annual rental payment rounded to 0 decimal places

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Prepare all the necessary journal entries for Vaughn for 2017.

Answer 1

Answer:
Present Value of Annual Payment          = Fair Value (-) Present Residual value          = $ 184,000 (-) [ $ 8,000 x PVF ( 12%, 6 Years )           = $ 184,000 (-) [ $ 8,000 x 0.50663 ]           =   $ 184,000 (-) $ 4,053.04           =    $ 179,946.96
The amount of the annual rental payment               = Present Value of Annual Payment / PV Annuity Due (12%, 6 Years )               =   $ 179,946.96 / 4.60478	$ 39,078