Question 2

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On January 1, 2017, Morris Company sells land to Lopez Corporation for 6,000,000, and immediately leases the land back. The following information relates to this transaction:

1. The term of the noncancelable lease is 20 years and the title transfers to Morris Company at the end of the lease term.

2. The land has a cost basis of 5,040,000 to Morris.

3. The lease agreement calls for equal rental payments of 611,112 at the end of each year.

4. The land has a fair market value of 6,000,000 on January 1, 2017.

5. The incremental borrowing rate of Morris Company is 10%. Morris is aware that Lopez Corporation set the annual rentals to ensure a rate of return of 8%.

6. Morris Company pays all executory cost which total 255,000 in 2017

7. Collectibility of the rentals is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.

Partial Lease Amortization Schedule
Date	Annual Lease Payment	Interest 8%	Reduction of Lease Obligation	Balance
1/1/17
12/31/17