On January 1, 2014, Bensen Company leased equipment to Flynn Corporation. The fo

Question

On January 1, 2014, Bensen Company leased equipment to Flynn 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 2014. 3. The fair value of the equipment on January 1, 2014, is $194,600, and its cost is $147,896. 4. The equipment has an economic life of 8 years, with an unguaranteed residual value of $10,980. Flynn depreciates all of its equipment on a straight-line basis. 5. Bensen set the annual rental to ensure an 8% rate of return. Flynn’s incremental borrowing rate is 9%, 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. (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 $ SHOW LIST OF ACCOUNTS LINK TO TEXT Prepare all the necessary journal entries for Flynn for 2014. (Credit account titles are automatically indented when amount is entered. Do not indent manually. 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.) Date Account Titles and Explanation Debit Credit 1/1/14 (To record the lease.) (To record lease payment.) 12/31/14 (To record depreciation.) (To record interest.) SHOW LIST OF ACCOUNTS LINK TO TEXT Prepare all the necessary journal entries for Bensen for 2014. (Credit account titles are automatically indented when amount is entered. Do not indent manually. 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.) Date Account Titles and Explanation Debit Credit 1/1/14 (To record the lease.) (To record lease payment.) 12/31/14 (To record interest.)

Explanation / Answer

Calculation of annual lease rentals:

Present value of cash outflow = Present value of cash inflow

147,896 = (Annual lease rentals*Present value annuity factor @ 8% for 6 years) +salvage value * Present value factor @ 8% for 8th year

147,896 = (ALR*4.62288) + 10,980*0.54027

147,896 = (ALR*4.62288) + 5932

147,896 - 5932 =  (ALR*4.62288)

141,964 = (ALR*4.62288)

ALR = 141,964/4.62288

ALR = $30709

Annual lease rentals = $30709

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