(Lessee-Lessor Entries; Sales-Type Lease) On January 1, 2014, Global Corporation leased equipment to Local Inc. The following information pertains to this lease.
1. The term of the noncancelable 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 in 2014.
3. The fair value of the equipment on January 1, 2014, is $320,000, and its cost is $265,000.
4. The equipment has an economic life of 8 years, with an unguaranteed residual value of $30,000.
Local depreciates all of its equipment on a straight-line basis.
5. Global set the annual rental to ensure a 12% rate of return. Local's incremental borrowing rate is 10%, 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.
Instructions
(a) Calculate the amount of the annual rental payment.
(b) Discuss the nature of this lease to Global and Local.
(c) Prepare all the necessary journal entries for Local for 2014.
(d) Prepare all the necessary journal entries for Global for 2014.