LePage Manufacturing Ltd$.$ agrees to lease equipment to Labont$$ Lt$$e$.$ on July $15,2023.$ LePage follows ASPE and Labont$$ is a public company following IFRS. The following information relates to the lease agreement:

The lease term is seven years, with no renewal option, and the equipment has an estimated economic life of nine years.

The equipment$$s cost is $$420,000$ and the asset$$s fair value on July $15,2023,$ is $$560,000.$

At the end of the lease term, a payment to LePage, the lessor, in the amount of $$80,000$ is expected to be payable by Labont$,$ the lessee, under a residual value guarantee. Labont$$ depreciates all of its equipment on a straight$-$line basis.

The lease agreement requires equal annual rental payments beginning on July $15,2023.$

LePage usually sells its equipment to customers who buy the product outright, but Labont$$ was unable to get acceptable financing for a cash purchase. LePage$$s credit investigation on Labont$$ revealed that the company$$s financial situation was deteriorating. Because Labont$$ had been a good customer many years ago, LePage agreed to enter into this lease agreement, but used a higher$-$than$-$usual $15\%$ interest rate in setting the lease payments. Labont$$ is aware of this rate.

LePage is uncertain about what additional costs it might have to incur in connection with this lease during the lease term, although Labont$$ has agreed to pay all executory costs directly to third parties.

LePage incurred legal costs of $$2,500$ in early July $2023$ in finalizing the lease agreement.

Instructions

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

Using $(1)$ time value of money tables, $(2)$ a financial calculator, or $(3)$ Excel functions, calculate the amount of the annual rental payment that is required to obtain a return of $15\%$ for LePage.