Exercise 21-10 (Part Level Submission) Morgan Leasing Company signs an agreement

Question

Exercise 21-10 (Part Level Submission) Morgan Leasing Company signs an agreement on January 1, 2014, to lease equipment to Cole Company. The following information relates to this ag 1. The term of the noncancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years. 2. The cost of the asset to the lessor is $248,700. The fair value of the asset at January 1, 2044, is $248,700. 3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $60,192, none of which is guaranteed. Cole Company assumes direct responsibility for all executory costs 5. The agreement requires equal annual rental payments, beginning on January 1, 2014. 6. Collectibility of the lease payments is reasonably predjctable. There are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor

Explanation / Answer

Cost of equipment = 248700

Unguranted residual value = 60,192

PV of residual value for 6 years @ 10% (60192 X .56447) = 33977

Fair value to be recovered from lease payment = 248700 - 33977 = 214723

PV factor for 6 years @ 10% = 4.35526

Annual lease payment (214723/PV factor for 6 years @ 10% 4.35526) = 49302

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