On January 1, 2012, Palmer Company leased equipment to Woods 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 2012.|
|3.||The fair value of the equipment on January 1, 2012, is $223,700, and its cost is $183,434.|
|4.||The equipment has an economic life of 8 years, with an unguaranteed residual value of $10,120. Woods depreciates all of its equipment on a straight-line basis.|
|5.||Palmer sets the annual rental to ensure an 8% rate of return. Woodsâ€™s incremental borrowing rate is 9%, and the implicit rate of the lessor is unknown.|
Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by the lessor.
What is the annual rental payment?