Reference no: EM13343024

Metro Industries manufacture s equipment for sale or lease. Federated Corp (lessee) leased a tooling machine from Metro Industries (lessor) on 12/31/2010, for a three-year period ending December 31, 2013. On 12/31/2013, the equipment will revert back to the lessor. The equipment has a fair value or "selling price" of $128,872 and it costs the lessor $90,000. The lease agreement specified annual payments (note: you need to figure out the annual payment with the given info) to be paid with the first payment at the inception of the lease, and each December 31 through 2012. The machine's useful life is four years. The residual value at the end of 12/31/2013 is expected to be $35,000. The lessee does guarantee the residual value. The lessee has incremental borrowing rate of 14% and is aware of the lessor's implicit rate of return of 12%. Assume the fair value of the equipment at the end of lease term (12/31/2013) will be $10,000. Do the followings:

1) Show how the lessor determines the lease payment;

2) Prepare the appropriate entries for both the lessee and the lessor from the inception of the lease through the return of the equipment back to the lessor.