Problem 21-1 Blue Leasing Company agrees to lease machinery to Kingbird Corporat

Question

Problem 21-1 Blue Leasing Company agrees to lease machinery to Kingbird Corporation on January 1, 2017. The following information relates to the lease agreement. 1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. 2. The cost of the machinery is $565,000, and the fair value of the asset on January 1, 2017, is $752,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $103,000. Kingbird depreciates all of its equipment on a straight-line basis. 4. The lease agreement requires equal annual rental payments, beginning on January 1, 2017 5. The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor Blue desires a 10% rate of return on its investments. Kingbird's incremental borrowing rate is 11% and the lessor's implicit rate is unknown 6. (Assume the accounting period ends on December 31.) Calculate the amount of the annual rental payment required. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to o decimal places e.g. 58,971) Annual rental payment $ TOF ACCOUNTS LINK TO TEXT LINK TO TEXT

Explanation / Answer

a)

Workings:

PV @ 10% for 7th year = 0.51316

b) PVAF of annuity due @11% for 7 years = 5.23054

PV at the end of 7th year @11% = 0.48166

c)

d)

Fair Value of the Asset 752000 Guaranteed Residual Value
[103000*0.51316] 52855.48 Present Value of Lease
[a] 699144.52 PVAF of annuity due @10% for 7 years
[b] 5.35526 Annual Rental Payment
[a/b] 130553

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