Reference no: EM132722541
Question - Concord Leasing Company agrees to lease equipment to Marigold Corporation on January 1, 2020. 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 $514,000, and the fair value of the asset on January 1, 2020, is $677,000.
3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $55,000. Marigold estimates that the expected residual value at the end of the lease term will be 55,000. Marigold amortizes all of its leased equipment on a straight-line basis.
4. The lease agreement requires equal annual rental payments, beginning on January 1, 2020.
5. The collectibility of the lease payments is probable.
6. Concord desires a 10% rate of return on its investments. Marigold's incremental borrowing rate is 11%, and the lessor's implicit rate is unknown.
Required -
(a) Discuss the nature of this lease for both the lessee and the lessor.
(b) Calculate the amount of the annual rental payment required.
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