E21-7 (L04) (Lessee-Lessor Entries; Sales-Type
Lease) On January 1, 2017, Bensen Company leased equipment
to Flynn Corporation. The following information pertains to this
lease.
Thetermofthenoncancelableleaseis6years,withnorenewaloption.Theequipmentrevertstothelessoratthetermina-
tion of the lease.
Equal rental payments are due on January 1 of each year,
beginning in 2017.
The fair value of the equipment on January 1, 2017, is $150,000,
and its cost is $120,000.
Theequipmenthasaneconomiclifeof8years,withanunguaranteedresidualvalueof$10,000.Flynndepreciatesallofits
equipment on a straight-line basis.
Bensensettheannualrentaltoensurean11%rateofreturn.Flynn’sincrementalborrowingrateis12%,andtheimplicit
rate of the lessor is unknown.
Collectibilityofleasepaymentsisreasonablypredictable,andnoimportantuncertaintiessurroundtheamountofcosts
yet to be incurred by the...