Reference no: EM132251666
Question - On January 1, 2018, capital Corp leased equipment to Hinton Corp. The following information pertains to this lease.
1. The term of the non-cancelable lease is 12 years, with no renewal option. The equipment reverts to the lessor at the termination of the lease.
2. Equal rent payments are due on January 1 of each year, beginning in 2018.
3. The fair value of the equipment on January 1, 2018, is $247,500, and its cost is $198,000.
4. The equipment has an economic life of 16 years. Hinton depreciates all of its equipment on a straight line basis.
5. Capital set the annual rental to ensure a 6% rate of return. Hinton's incremental borrowing rate is 4%, and the implicit rate of the lessor is unknown.
6. Collectability of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by the lessor.
Discuss the nature of this lease to capital and Hinton. Calculate the amount of the annual rent payment.
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