Teal Mountain Leasing Company signs an agreement on January 1, 2020, to lease equipment to Cole Company. The following information relates to this agreement. Annual rental payment is $89,281.

1.		The term of the non-cancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years.
2.		The cost of the asset to the lessor is $451,000. The fair value of the asset at January 1, 2020, is $451,000.
3.		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 $24,225, none of which is guaranteed.
4.		The agreement requires equal annual rental payments, beginning on January 1, 2020.
5.		Collectibility of the lease payments by Teal Mountain is probable.

Prepare an amoritization schedule that is suitable for the lessor for the lease term.

Assuming the lessor desires a 9% rate of return on its investment, calculate the amount of the annual rental payment required. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and the final answer to 0 decimal places e.g. 5,275.)

Amount of the annual rental payment

$enter the Amount of the annual rental payment in dollars

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Expert Answer

• MANISH PATEL answered this

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  Answer -

  Statement showing the calculation of annual rental payment

  No.	Particulars	Amount ($)	Explanation
  I.	Fair value of leased asset to lessor	451000	Given in question
  II.	Present value of unguaranteed residual value	14445	Residual value of leased asset * Present value of $1 at 9% for 6 periods = $24225 * 0.59627 = $14445
  III.	Amount to be recovered through lease payments	436555	I - II
  	Annual rental payment	89281	Amount to be recovered through lease payments / Present value of an annuity due of $1 at 9% for 6 periods = $436555 / 4.88965 = $89281