Reference no: EM132678086

Concord Leasing Company agrees to lease equipment to Marigold Corporation on January 1, 2020. 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 9 years.
2. The cost of the machinery is $514,000, and the fair value of the asset on January 1, 2020, is $677,000.
3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $55,000. Marigold estimates that the expected residual value at the end of the lease term will be 55,000. Marigold amortizes all of its leased equipment on a straight-line basis.
4. The lease agreement requires equal annual rental payments, beginning on January 1, 2020.
5. The collectibility of the lease payments is probable.
6. Concord desires a 10% rate of return on its investments. Marigold's incremental borrowing rate is 11%, and the lessor's implicit rate is unknown.

Problem 1: Discuss the nature of this lease for both the lessee and the lessor.

Problem 2: Calculate the amount of the annual rental payment required. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,972.)