Lessee Accounting Issues

Timmer Company signs a lease agreement dated January 1, 2013, that provides for it to lease equipment from Landau Company beginning January 1, 2013. The lease terms, provisions, and related events are as follows:

The lease is noncancelable and has a term of 5 years.

The annual rentals are $83,222.92, payable at the end of each year, and provide Landau with a 12% annual rate of return on its net investment.

Timmer agrees to pay all executory costs at the end of each year. In 2013, these were insurance, $3,760; property taxes, $5,440. In 2014: insurance, $3,100; property taxes, $5,330.

There is no renewal or bargain purchase option.

Timmer estimates that the equipment has a fair value of $300,000, an economic life of 5 years, and a zero residual value. Timmer's incremental borrowing rate is 16%, it knows the rate implicit in the lease, and it uses the straightline method to record depreciation on similar equipment.

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Required:

1. Calculate the amount of the asset and liability of Timmer at the inception of the lease. Round to the nearest dollar.

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