On January 1, 2017, Sunland Company leased equipment to Packer Corporation. The

Question

On January 1, 2017, Sunland Company leased equipment to Packer Corporation. The following information pertains to this lease The term of the noncancelable lease is 5 years. At the end of the lease term, Packer has the option to purchase the equipment for $7,000, while the expected residual value at the end of the lease is $14,000 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 $205,000, and its cost is $153,000 4. The equipment has an economic life of 6 years. Packer depreciates all of its equipment on a straight-line basis 5, Sunland set the annual rental to ensure a 5% rate of return. Packer'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 Both the lessor and the lessee's accounting periods end on December 31. Click here to view the factor table (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Discuss the nature of this lease to Sunland and Packer. The nature of this lease for Sunland is a lease The nature of this lease for Packer isa lease. SHOW LIST OF ACCOUNTS Calculate the amount of the annual rental payment. (Round answer to O decimal places, e.g. 5,275.) Annual rental payment

Explanation / Answer

1. For Packer this is Capital Lease as LEase term is more than 75% of economic life of asset and PV of annual lease payment is more than 90% of fair value of asset.

For Sunlan also this is capital lease as PV is nore than 90% of value and since Cost is lesser than fair value its Sale Type Capital Lease.

2.

2 PV of Annual Lease (5 year,5%=4.5456)+PV of Purchase Opetion 7000 (5th year5%=0.7835=205000 Fair Market Value Annual Lease Payment*4.5456+(7000*0.7835)=205000 Annual Lease Payment*4.5456+5485=205000 Annual Lease Payment=205000-5485/4.5456 Annual Lease Payment=43892 3 Date Annual Lease payment+pur option Interes 5% Reduction in lease Lease receivable 1 Jan 17 205000 1 Jan 17 43892 43892 161108 1 Jan 18 43892 8055 35837 125271 1 Jan 19 43892 6264 37628 87643 1 Jan 20 43892 4382 39510 48133 1 Jan 21 43892 2407 41485 6648 31-12-2021 7000 352 6648 0 Sunland Books 1 Jan 17 Lease Receivable 205000 Cost of goods sold 153000 Sales Revenue 205000 Inventory 153000 (Lease recoreded) 1 Jan 17 Cash 43892 Lease Receivable 43892 31 Dec 17 Interest Receivable 8055 Interest Revenue 8055 Packers Books 1 Jan 17 Lease Equipment 205000 Lease Liability 205000 (to record lease) 1 Jan 17 Lease Liability 43892 Cash 43892 (Lease payment) 31 Dec 17 Depreciation Expenses          34,167 Accumulated Depreciation-LeaseD Equipment                          34,167 (Amortisation) 205000/6 31 Dec 17 Interest Expense 8055 Interest Payable 8055 (Interest)

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