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Calculate the amount of the annual rental payment required

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Reference no: EM133110937

Question - HKU Leasing agrees to lease equipment to Minion Furniture on January 1: 20K]. 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 T years.

2. The cost of the machinery is $700,000. The fair value of the asset on January I, 20Xl is $700,000.

3. The lease contains a bargain purchase option of $60,000. At the end of the lease term, the asset reverts to the lessor and expected residual value is zero. Minion uses straight-line depreciation for all long-term assets.

4. HKU's implicit rate is 6%, and Minion's incremental borrowing rate is 6%.

5. The lease is a non-cancelable lease. First payment is made in advance and the remaining payment is made on Dec 31 each year.

Required -

1. Calculate the amount of the annual rental payment required.

2. Prepare journal entries to record the lease for HKU (lessor) for the year 20X1.

3. Prepare journal entries to record the rental payment for HKU (lessor) for the year 20X2.

Reference no: EM133110937

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