On the year January 1, 2012, Palmer Company leased equipment to Woods Corporation. The given information pertains to this lease.
a) The term of non-cancelable lease is 6 years, with no renewal option. The equipment reverts to the lesser at the termination of lease.
b) Equivalent rental payments are due on January 1 of each year, starting in 2012.
c) The fair value of the equipment on January 1, 2012, is $209,200, and its cost is $173,636.
d) The equipment consists of an economic life of 8 years, with an unguaranteed residual value of $11,080. Woods depreciates all of its equipment on the straight-line basis.
e) Palmer sets the annual rental to make sure a 9% rate of return. Woods's incremental borrowing rate is 10% and the implicit rate of the lesser is unknown.
f) Collectability of lease payments is reasonably predictable and no significant uncertainties surround the amount of costs yet to be incurred by the lesser.