On January 1, 2012, Palmer Company leased equipment to Woods Corporation. The following information pertains to this lease. 1. The term of…
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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. Woods’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.
What is the annual rental payment?
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