Question - Stark Industries both sells and leases equipment it manufactures to customers. The most popular piece of equipment is the arc reactor. Costs to manufacture each unit total $575,000. The fair value of each arc reactor is $967,500. Wayne Enterprises agrees to lease one of the arc reactors beginning January 1, 2014. The estimated economic and useful life of the arc reactor is eight years.
Standard lease terms provide for eight equal annual payments. Each annual payment includes $3,725 in executory costs. The first payment is due when the lease is signed and subsequent payments are due January 1 each year thereafter. Stark uses an implicit rate of interest of 9%per year in all its lease computations.
Wayne Enterprises' incremental borrowing rate is determined to be 7%. Because the equipment is very specialized, Wayne is required to guarantee a salvage value of $50,000 upon expiration of the lease.
There are no important uncertainties, and collectability is reasonably predictable and assured.
Both the lessee and the lessor report financial results on a calendar-year basis. Wayne Enterprises is not aware of lessor Stark Industries' implicit interestrate.
REQUIRED:
1. Compute the annual lessee payment Wayne Enterprises will make to the Stark Industries
2. Prepare Stark Industries' amortization table
3. Prepare Wayne Enterprises' amortization table
4. Prepare, in good form, all 2014 entries required on Stark's books to record the lease of equipment to Wayne
5. Prepare, in good form, all 2014 entries required on Wayne's books to record the lease of the arc reactor from Stark Industries. Depreciation is computed and recorded once a year on December 31 using the straight-line basis.