Question

Blue Leasing Company agrees to lease equipment to Kingbird Corporation on January 1, 2020. The following information relates to the lease agreement. 1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. 2. The cost of the machinery is $489,000, and the fair value of the asset on January 1, 2020, is $699,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $60,000. Kingbird estimates that the expected residual value at the end of the lease term will be 60,000. Kingbird amortizes all of its leased equipment on a straight-line basis. 4. The lease agreement requires equal annual rental payments, beginning on January 1, 2020. 5. The collectibility of the lease payments is probable. 6. Blue desires a 9% rate of return on its investments. Kingbird’s incremental borrowing rate is 10%, and the lessor’s implicit rate is unknown. (Assume the accounting period ends on December 31.)

Calculate the amount of the annual rental payment required. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,972.)

Annual rental payment

$

Answer 1

Answer:

Annual rental payment = $132,363

Explanation:

Calculation of annual rental payment:

Information Given:

Fair value of the asset on January 1, 2020 =  $699,000

Guaranteed residual value =  $60,000

Present value of $1 at 9% for 7 periods (PVIF 9%, 7) = .54703

Present value of an annuity due at 9% for 7 periods (PVIFA 9%, 7) = 5.48592

Annual rental payment = [Fair value of the asset - (Guaranteed residual value × PVIF 9%, 7)] / PVIFA 9%, 7

Annual rental payment = $699,000 ($60,000 × .54703) / 5.48592

Annual rental payment = ($699,000 - $32,822) 5.48592

Annual rental payment = $666,178 / 5.48592

Annual rental payment = $121434