Question

Sage Hill Leasing Company signs an agreement on January 1, 2020, to lease equipment to Cole Company. The following information relates to this agreement.

1. The term of the non-cancelable 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 $251,000. The fair value of the asset at January 1, 2020, is $251,000.
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 $25,490, none of which is guaranteed.
4. The agreement requires equal annual rental payments, beginning on January 1, 2020.
5. Collectibility of the lease payments by Sage Hill is probable.
Assuming the lessor desires a 7% rate of return on its investment, calculate the amount of the annual rental payment required.

Answer 1

$45,884

Step-by-step explanation:

The computation of the annual rental payment required is shown below:

Fair value $251000

Less: PV of unguaranteed residual value

unguaranteed residual value $25,490

Multiply with PVF(7%,6) 0.666342

Less: PV of unguaranteed residual value $16,985

Recovered amount through periodic payments $234,015

Divided with PVADIF(7%,6) 5.100197

lease payments payable at beginning of each year $45,884