(Computation of Rental; Journal Entries for Lessor) Horizon Leasing Inc. signs an agreement on January 1, 2014, to lease equipment to one of its customers. The following information relates to this agreement.
1. The term of the noncancelable lease is 8 years with no renewal option. The equipment has an estimated economic life of 10 years.
2. The cost of the asset to the lessor is $850,000. The fair value of the asset at January 1, 2014, is $850,000.
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 $92,547, none of which is guaranteed.
4. The lessee assumes direct responsibility for all executory costs.
5. The agreement requires equal annual rental payments, beginning on January 1, 2014.
6. Collectibility of the lease payments is reasonably predictable. There are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.
Instructions
(a) Assuming the lessor desires an 8% rate of return on its investment, calculate the amount of the annual rental payment required. Round to the nearest dollar.
(b) Prepare an amortization schedule that would be suitable for the lessor for the lease term.
(c) Prepare all of the journal entries for the lessor for 2014 and 2015 to record the lease agreement, the receipt of lease payments, and the recognition of income. Assume the lessor's annual accounting period ends on December 31.