Rigger Taffy Inc. manufactures an high-speed candy making machine with an estimated life of 10 years and leases it to Old Mill Candy for a period of 8 years. The normal selling price of the machine is $169,579, and its guaranteed residual value at the end of the non-cancelable lease term is estimated to be $8,000. Old Mill will pay rents of $25,000 at the beginning of each year. Brigger incurred costs of $131,000 in manufacturing the machine and $4,500 in legal fees directly related to the signing of the lease. Brigger has determined that the collectibility of the lease payments is probable and that the implicit interest rate is 6%.

Instructions

(Round all numbers to the nearest dollar.)

(a) Discuss the nature of this lease in relation to the lessor and compute the amount of each of the following items.

1) Lease receivable at commencement of the lease.

2) Sales price.

3) Cost of sales.

(b) Prepare a 8-year lease amortization schedule for Brigger, the lessor.

(c) Prepare all of the lessor’s journal entries for the first year.