Skysong Leasing Company signs an agreement on January 1, 2020, to lease equipment to Cole Company. The following information relates to this agreement.1. The term of the non-cancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years.2. The cost of the asset to the lessor is $421,000. The fair value of the asset at January 1, 2020, is $421,000.3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $23,000, none of which is guaranteed.4. The agreement requires equal annual rental payments, beginning on January 1, 2020.5. Collectibility of the lease payments by Skysong is probable.Assuming the lessor desires a 9% rate of return on its investment, calculate the amount of the annual rental payment required.

The following information is given in the question: The Fair value of a leased asset the lessor (January 1, 2020) = $421,000 Rate of return = 9% Residual value = $23,000 Lease term = 6 yearsParticular Amount The Fair value of a leased asset the lessor (January 1, 2020)-A $421,000 The value of the leased asset at the end of the lease-B $23,000 Present Value factor at 9%, 6 years is-C 0.5963 The present value of residual value (January 1, 2020) -D = (BxC) $13,715 Amount to be recovered-E = A-D $407,285 Cumulative present value factor at 9%, 6 years is-F 4.88965 The Amount of rental annual payment-G = (E/F) $83,295.3279The Amount of rental annual payment is $83,295 (Rounded off)

Answered: Skysong Leasing Company signs an…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Skysong Leasing Company signs an agreement on January 1, 2020, to lease equipment to Cole Company. The following information relates to this agreement.

1.		The term of the non-cancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years.
2.		The cost of the asset to the lessor is $421,000. The fair value of the asset at January 1, 2020, is $421,000.
3.		The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $23,000, none of which is guaranteed.
4.		The agreement requires equal annual rental payments, beginning on January 1, 2020.
5.		Collectibility of the lease payments by Skysong is probable.

Assuming the lessor desires a 9% rate of return on its investment, calculate the amount of the annual rental payment required.

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