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.
1. Calculate the amount of the asset and liability of Timmer at the inception of the lease. Round to the nearest dollar.
$
2. Prepare a table summarizing the lease payments and interest expense. Enter all amounts as positive numbers. Round your answers to the nearest cent. If an amount is zero, enter "0".
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Lease Payments and Interest Expense Summary | |
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| | | | Interest Expense at 12% on Obligation Balance | | | Reduction of Lease Obligation | | | Balance of Lease Obligation | |
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