Grant Leasing Company agrees to lease machinery to Jackson Corporation on January 1, 2013. The following information relates to the lease agreement
The term of the lease is 7 years with no renewal option and the machinery has an estimated economic life of 9 years.
The cost of the machinery is $525,000, and the fair value at 01/01/13 is $700,000.
At the end of the lease life, the asset reverts to Grant and has a guaranteed residual value of $100,000. Jackson depreciates all of its equipment on a straight-line basis,
The lease agreement requires equal annual rental payments, starting on 01/01/13.
The collectibility of the lease payments is reasonably predictable and there are no important uncertainties surrounding the amount of costs to be incurred by the lessor.
Grant desires a 10% rate of return on its investments. Jackson's incremental borrowing rate is 11% and the lessor's implicit rate is unknown.
(a) Discuss the nature of this lease for both lessee and lessor.
(b) Calculate the amount of annual rental payment required.
(c) Compute the Present Value of the minimum lease payments.
(d) Compute the Present Value of the minimum lease payments.
(e) Prepare the journal entries Grant would make in 2013 related to the lease.