Question #2

Kirk Leasing Corporation signs an agreement on January 1, 2020 to lease machine to Hartlen Limited. The following information relates to the agreement.

• The term of the non-cancellable lease is five (5) years, with no renewal option. The machine has an estimated economic life of seven (7) years.
• The asset's fair value on January 1, 2020 is $400,000.
• The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $100,000, which is NOT guaranteed by the lessee.
• The agreement requires equal annual rental payments of $81,036 to Kirk, the lessor, beginning on January 1, 2020.
• Hartlen Limited pays $4,500 executory cost to Kirk Leasing, in addition to the rental payment above.
• The lessee's incremental borrowing rate is 11%. The lessor's implicit rate is 10% and is known to the lessee.
• Hartlen Limited uses the straight-line depreciation method for all machine and rounds amounts to the nearest dollar.