Exercise 21-7 (Part Level Submission) (b) Exercise 21-7 (Part Level Submission)
ID: 2561479 • Letter: E
Question
Exercise 21-7 (Part Level Submission)
(b)
Exercise 21-7 (Part Level Submission)
On January 1, 2017, Oriole Company leased equipment to Waterway 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 $188,000, and its cost is $150,400. 4. The equipment has an economic life of 8 years, with an unguaranteed residual value of $8,000. Waterway depreciates all of its equipment on a straight-line basis. 5. Oriole set the annual rental to ensure an 11% rate of return. Waterway’s incremental borrowing rate is 12%, 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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Explanation / Answer
Fair value of asset 188000 Less: Present value of unguaranteed residual value 4277 =8000*0.53464 Amount to be recovered through annual lease payments 183723 The amount of the annual rental payment 39028 =183273/4.6959
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