Direct Financing Lease with Residual Value
Massachusetts Casualty Insurance Company decides to enter the leasing business. It acquires a specialized packaging machine for $300,000 cash and leases it for a period of six years, after which the machine is to be returned to the insurance company for disposition. The expected unguaranteed residual value of the machine is $20,000. The lease terms are arranged so that a return of 12% is earned by the insurance company.
1. Calculate the annual lease payment, payable in advance, required to yield the desired return.
2. Prepare entries for the lessor for the first year of the lease, assuming the machine is acquired and the lease is recorded on January 1, 2008. The first lease payment is made on January 1, 2008, and subsequent payments are made each December 31.
3. Assuming that the packaging machine is sold by Massachusetts to the lessee at the end of the six years for $29,000, give the required entry to record the sale.