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Blossom Leasing Company agrees to lease equipment to Blue Corporation on January 1, 2020. The following information relates to the lease agreement. 1. The term
Blossom Leasing Company agrees to lease equipment to Blue 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 $520,000, and the fair value of the asset on January 1, 2020, is $737,000. | |
3. | At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $60,000. Blue estimates that the expected residual value at the end of the lease term will be 60,000. Blue 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. | Blossom desires a 10% rate of return on its investments. Blues incremental borrowing rate is 11%, and the lessors implicit rate is unknown. |
(Assume the accounting period ends on December 31.)
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