Delta Company sells high-end laser printers for $5,000 each. They also offer the option to lease the printers for 5 years. The computers cost Delta $3,500 to manufacture. On January 1, 2014, Delta leased 10 computers to P&P, and required that the first payment be made at that time. At the end of the lease term, the printers will be returned to Delta. Although the printers will be considered obsolete at the end of the lease, they will still be worth something at that time. Delta wants to recover the full sales price, plus 9% interest, over the five-year term of the lease.
Assume that, for this lease, P&P’s incremental borrowing rate is 16%, and it is unaware of Delta’s implicit interest rate. P&P assumes the printers will last 5 years.
Required:
a. Determine the amount of the lease payments, as determined by Delta.
b. Provide the entries required on Delta’s books to record the lease and the first payment.
c. Compute the total income to be recognized by Delta Company in the first year of the lease.