Exercise 2110 Shamrock Leasing Company signs an agreement on

Exercise 21-10 Shamrock Leasing Company signs an agreement on January 1, 2017, to lease equipment to Cole Company. The following information relates to this agreement. 1. The term of the noncancelable 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 $271,000. The fair value of the asset at January 1, 2017, is $271,000 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 $200,346, none of which is guaranteed. 4. Cole Company assumes direct responsibility for all executory costs 5. The agreement requires equal annual rental payments, beginning on January 1, 2017. 6. Collectibility of the lease payments is reasonably predictable. There are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor Click here to view factor tables Assuming the lessor desires a 11% rate of return on its investment, calculate the amount of the annual rental payment required. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to O decimal places e.g. 58,971) The amount of the annual rental payment SHOW LIST OF ACCOUNTS

Solution

First we\'ll try to estimate the annual rent paid to the lessor

Present value = $271,000

Future Value = $200,346

Interest = 11%

Tenor = 6 Years

This gives an annual Payment of $38,739

Beginning receivable : $271,000

First Year Interest payment = 0.11*$271,000 = $29,810

First Year Principal payment = $38,739 - $29,810 = $8,929

Balance left after 1st year= $271,000 - $8,929 = $262,071

Second Year Interest payment = 0.11*$262,071= $28,828

Second Year Principal payment = $38,739 - $28,828= $9,911

Balance left after 2nd year= $262,071 - $9,911 = $252,160

Third Year Interest payment = 0.11*$252,160= $27,738

Third Year Principal payment = $38,739 - $27,738 = $11,001

Balance left after 3rd year= $252,160 - $11,001= $241,158

Fourth Year Interest payment = 0.11*$241,158 = $26,527

Fourth Year Principal payment = $38,739 - $26,527= $12,212

Balance left after 4th year= $241,158 - $12,212 = $228,947

Fifth Year Interest payment = 0.11*$228,947 = $25,184

First Year Principay payment = $38,739 - $25,184 = $13,555

Balance left after 5th year= $228,947 - $13,555 = $215,392

6th Year Interest payment = 0.11*$215,392 = $23,693

6th Year Principay payment = $38,739 - $23,693 = $15,046

Balance left after 6th year= $215,392 - $15,046 = $200,346

2017 journal entry

1/1/2017: Sales : Debit A/R, credit Inventory

31/12/2017 Interest income: Debit cash, credit sales

31/12/2017 Repayment Principal: Debit cash, Credit A/R

31/12/2018 Interest income: Debit cash, credit sales

31/12/2018 Repayment Principal: Debit cash, Credit A/R