Exercise 21-4 Swifty Leasing Company signs a lease agreement on January 1, 2017,

Question

Exercise 21-4 Swifty Leasing Company signs a lease agreement on January 1, 2017, to lease electronic equipment to Nash Company. The term of the noncancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement: 1. Nash Company has the option to purchase the equipment for $16,400 upon termination of the lease. 2. The equipment has a cost and fair value of $149,000 to Swifty Leasing Company. The useful economic life is 2 years, with a salvage value of $16,400. 3. Nash Company is required to pay $4,500 each year to the lessor for executory costs. 4. Swifty Leasing Company desires to earn a return of 9% on its investment. 5. Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.

Explanation / Answer

A)

B)

Computation of annual payments Cost (fair value) of leased asset to lessor 149000 Less: Present value of salvage value (residual value in this case) $16,400 x 0.84168 (Present value of 1 at 9% for 2 periods) 13803.55 Amount to be recovered through lease payments 135196.4 Two periodic lease payments $135196 ÷ 1.75911 76854.77

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