On January 1, 2021, Moorecraft Finance Company agreed to lease a piece of machinery to Ward Construction Products, Inc. Moorecraft paid $1,554,516 to acquire the machine from the manufacturer and carries it at this amount in its financial statements. The fair value (current selling price) of the machine is $1,554,516. The relevant lease terms follow. Annual rental payments of $263,516 are due on January 1 of each year. These payments do not include any executory costs. Lease term is 6 years. There is no purchase option. The lessor expects to recover the unguaranteed residual value of $280,000 at the termination of the lease. The economic life of the asset is 7 years. The lessor’s implicit rate is known to Ward Construction. Annual maintenance is $20,000, and annual property tax is $12,500. The lessee pays both on January 1 of the year to the lessor. The property taxes are included in the payment made by the lessee to the lessor. The lessor has no material uncertainties regarding future costs to be incurred under the lease, and collectability of lease payments is reasonably assured. Ward depreciates similar machinery that it owns using the straight-line method. The fiscal year ends on December 31 for both companies. Determine the implicit rate.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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On January 1, 2021, Moorecraft Finance Company agreed to lease a piece of machinery to Ward Construction Products, Inc. Moorecraft paid $1,554,516 to acquire the machine from the manufacturer and carries it at this amount in its financial statements. The fair value (current selling price) of the machine is $1,554,516. The relevant lease terms follow.

Annual rental payments of $263,516 are due on January 1 of each year. These payments do not include any executory costs.
Lease term is 6 years.
There is no purchase option.
The lessor expects to recover the unguaranteed residual value of $280,000 at the termination of the lease.
The economic life of the asset is 7 years.
The lessor’s implicit rate is known to Ward Construction.
Annual maintenance is $20,000, and annual property tax is $12,500. The lessee pays both on January 1 of the year to the lessor. The property taxes are included in the payment made by the lessee to the lessor.
The lessor has no material uncertainties regarding future costs to be incurred under the lease, and collectability of lease payments is reasonably assured.
Ward depreciates similar machinery that it owns using the straight-line method.
The fiscal year ends on December 31 for both companies.