On January 1, 2011, 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 2011.
3.The fair value of the equipment on January 1, 2011, is $200,000, and its cost is $150,000.
4.The equipment has an economic life of 8 years, with an unguaranteed residual value of $10,000. Woods depreciates all of its equipment on a straight-line basis.
5.Palmer set the annual rental to ensure an 11% rate of return. Woods's incremental borrowing rate is 12%, 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.
Instructions
(a) Answer the following questions.
- What type of lease is recorded by Palmer? Capital LeaseOperating Lease
- What type of lease is recorded by Woods? Operating LeaseCapital Lease
(b) Calculate the amount of the annual rental payment. (Round your answer to the nearest dollar eg 58,971.)
(c) Prepare all the necessary journal entries for Woods for 2011.