Question - On January 01 2011 palmer company leased equipment to woods corporation, the following information pertains to this lease:
1. The term of the non-cancelable 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 2011
3. The fair Value of the equipment on January 012011 is $200000 and it costs $150000
4. The equipment has an economic life of 8 years with an un-guaranteed residual value of $10000 Woods depreciates all of its equipment on a straight line basis.
5. Palmer sets the annual rental to ensure an 11% rate if return. Woods incremental borrowing rate is 12% and the implicit rate of the lessor is unknown.
6. Collectability of lease payments is reasonably predictable and no important uncertainties surround the amounts of costs yet to be incurred by the lessor.
Required -
A. Calculate the amount of the annual rental payment.
B. Prepare all the journal entries for woods for 2011.
C. Prepare all the journal entries for Palmer for 2011.