On January 1, 2012, Palmer Company leased equipment to Woods Corporation. The following information pertains to this lease.
1. The term of the noncancelable lease is6years, 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 in 2012.
3. The fair value of the equipment on January 1, 2012, is $233,000, and its cost is $195,720.
4. The equipment has an economic life of 8 years, with an unguaranteed residual value of $10,560. Woods depreciates all of its equipment on a straight-line basis.
5. Palmer sets the annual rental to ensure an8% rate of return. Woods's incremental borrowing rate is9%, and the implicit rate of the lessor is unknown.
6. Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by the lessor.