Problem - On January 1, 2017, Sunland Company leased equipment to Coronado Corporation. 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 2017.
3. The fair value of the equipment on January 1, 2017, is $147,000, and its cost is $117,600.
4. The equipment has an economic life of 8 years, with an unguaranteed residual value of $9,000. Coronado depreciates all of its equipment on a straight-line basis.
5. Sunland set the annual rental to ensure an 10% rate of return. Coronadoâs incremental borrowing rate is 11%, 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.
(Both the lessor and the lesseeâs accounting period ends on December 31.)
Calculate the amount of the annual rental payment.