Calculation of annual rental payments

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Reference no: EM13135007

On December 31, 2010, Graves leased equipment to Garcia for a 4-year period ending December 31, 2014, at which time possession of the leased asset will revert back to Graves. The equipment cost Graves $300,000 and has an expected life of six years. The normal selling price (and fair value) of the equipment is $365,760. The lessee-guaranteed residual value at December 31, 2014, is $25,000. Equal payments under the lease are $100,000 and are due on December 31 each year beginning December 31, 2010. Collectability of all lease payments is reasonably assured, and Graves has no material cost uncertainties. Garcia's incremental borrowing rate is 12% and the interest rate implicit in the lease agreement is 10% (this is known to Garcia). Both Graves and Garcia use straight-line depreciation and have December 31 fiscal year-ends. Describe how Graves calculated the $100,000 annual rental payments.

Reference no: EM13135007

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