On December 31, 2008, Rankin Corporation, a lessor of office machines, purchased a new machine for \($725,000\). It was delivered the same day (by prior arrangement) to Liska Company, the lessee. The following information relating to the lease transaction is available:
• The leased asset has an estimated useful life of five years, which coincides with the lease term.
• At the end of the lease term, the machine will revert to Rankin, at which time it is expected to have a salvage value of \($60,000\) (not guaranteed by Liska).
• Rankin’s implicit rate of return on its net lease investment is 8% (known by Liska).
• Liska’s incremental borrowing rate is 12% at December 31, 2008.
• Lease rentals consist of five equal annual payments, the first of which was paid on December 31, 2008.
• The lease is appropriately accounted for as a direct financing lease by Rankin and as a capital lease by Liska. Both lessor and lessee are calendar-year corporations and depreciate all fixed assets on the straight-line basis.
Required:
Round all amounts to the nearest dollar.
1. Compute the annual rental under the lease.
2. Compute the amounts of the Gross lease receivable and the Unearned interest revenue that Rankin should disclose at the inception of the lease on December 31, 2008.
3. What expense should Liska record for the year ended December 31, 2009?