Problem 21-1

Headland Leasing Company agrees to lease machinery to Sage Corporation on January 1, 2017. 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 $514,000, and the fair value of the asset on January 1, 2017, is $677,000.
3.		At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $90,000. Sage depreciates all of its equipment on a straight-line basis.
4.		The lease agreement requires equal annual rental payments, beginning on January 1, 2017.
5.		The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.
6.		Headland desires a 10% rate of return on its investments. Sages incremental borrowing rate is 11%, and the lessors implicit rate is unknown.

(Assume the accounting period ends on December 31.)

Calculate the amount of the annual rental payment required.

Compute the present value of the minimum lease payments.

Prepare the journal entries Sage would make in 2017 and 2018 related to the lease arrangement.

Prepare the journal entries Headland would make in 2017 and 2018.

Annual rental payment 117709