LessorMfg Corp. is a manufacturer of heavy equipment. On January 1, 2013, LessorMfg Corp. leases equipment to Small Company under a six-year noncancelable lease agreement. The following information about the lease and the equipment is provided:
1. Equal annual payments, that are due on December 31 each year, provide LessorMfg Corp. with an 8% return on net investment.
2. Title to the equipment passes to Small Corp at the end of the lease.
3. The fair value of the equipment is $50,000 on the date the lease was signed. The cost of the equipment to LessorMfgr Corp (the manufacturer). is $45,000. The equipment has an expected useful life of nine years.
4. Collectibility of the lease payments is reasonably predictable and there are no important uncertainties surrounding the amount of costs yet to be incurred by LessorMfg Corp.
Answer each of the following questions separately and in the order presented below. Be sure to label each of your responses to match the number of the question you are answering.
(i) What type of lease is this for the lessor? Discuss.
(ii) Calculate the annual lease payment. (Round to nearest dollar.)
(iii) Prepare a lease amortization schedule for LessorMfg Corp, the lessor, for the first three years.
(iv) Prepare the journal entries for the lessor for 2013 to record the lease agreement, the receipt of cash, and the recognition of income. Indicate the dates of your entries.