Collectibility of the rentals

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On January 1, 2011, Foley Company (as lessor) entered into a noncancelable lease agreement with Pinkley Company for machinery which was carried on the accounting records of Foley at $4,530,000 and had a market value of $4,800,000. Minimum lease payments under the lease agreement which expires on December 31, 2020, total $7,100,000. Payments of $710,000 are due each January 1. The first payment was made on January 1, 2011 when the lease agreement was finalized. The interest rate of 10% which was stipulated in the lease agreement is the implicit rate set by the lessor. The effective interest method of amortization is being used. Pinkley expects the machine to have a ten-year life with no salvage value, and be depreciated on a straight-line basis. Collectibility of the rentals is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.

Reference no: EM13129955

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