Reference no: EM132007053

Question - Special Corp (lessee) leased a tooling machine from General Industries (lessor) on 12/31/2013, for a five-year period ending December 31, 2018. On 12/31/2018, the equipment will return back to the lessor. The equipment has a fair value or "selling General Industries manufacture s equipment for sale or lease price" of $150,000 and it costs the lessor $110,000. 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 2017. The machine's useful life is six years. The residual value at the end of 12/31/2018 is expected to be $25,000. The lessee does NOT 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 (12/31/2018) will be $18,000. Do the followings:

1) Show how the lessor determines the lease payment;

2) What is the minimum lease payments for both lessee and lessor;

3) Prepare the appropriate entries (along with T-accounts) for both the lessee and the lessor from the inception of the lease through the return of the equipment back to the lessor.