Reference no: EM132604978
Question - Lessee-Lessor Entries: Sales-Type Lease
On January 1, 2018, Capital Corp. leased equipment to Hinton Corporation. The following information pertains to this lease.
1. The term of the noncancelable lease is 12 years, with no renewal option. The equipment reverts to the lessor at the termination of the lease.
2. Equal rental payments are due on January 1 of each year, beginning in 2018.
3. The fair value of the equipment on January 1, 2018, is $247,500, and its cost is $198,000.
4. The equipment has an economic life of 16 years. Hinton depreciates all of its equipment on a straight-line basis.
5. Capital set the annual rental to ensure a 6% rate of return. Hinton's incremental borrowing rate is 4%, and the implicit rate of the lessor is unknown.
6. Collectability of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by the lessor.
Required -
Discuss the nature of this lease to Capital and Hinton. Use the blank area in the template following the journal entries to make your notes.
Calculate the amount of the annual rental payment.
Make all the necessary journal entries for Hinton for 2018.
Make all the necessary journal entries for Capital for 2018.