Assume that on January 1, 2021, Fredder Corporation sells equipment to Finance Co. for $1,700,000 and immediately leases back the equipment. The relevant information is as follows. 1. The equipment was carried on Fredder's books at a value of $1,500,000. 2. The term of the non-cancelable lease is 3 years; title will not transfer to Fredder, and the expected residual value at the end of the lease is $125,000, all of which is unguaranteed. 3. The lease agreement requires equal rental payments of $277,635 at the beginning of each year. 4. The incremental borrowing rate for Fredder is 7%. Fredder is aware that Finance set the annual rental to ensure a rate of return of 7%. 5. The equipment has a fair value of $1,700,000 on January 1, 2021, and an estimated economic life of 10 years.
Assume that on January 1, 2021, Fredder Corporation sells equipment to Finance Co. for $1,700,000 and immediately leases back the equipment. The relevant information is as follows. 1. The equipment was carried on Fredder's books at a value of $1,500,000. 2. The term of the non-cancelable lease is 3 years; title will not transfer to Fredder, and the expected residual value at the end of the lease is $125,000, all of which is unguaranteed. 3. The lease agreement requires equal rental payments of $277,635 at the beginning of each year. 4. The incremental borrowing rate for Fredder is 7%. Fredder is aware that Finance set the annual rental to ensure a
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