E$21-7($Lessee$-$Lessor Entries; Sales$-$Type Lease$)$ On January $1,2014,$ Bensen Company leased equipment

to Flynn Corporation. The following information pertains to this lease.

The term of the noncancelable lease is $6$ years, with no renewal option. The equipment reverts to the

lessor at the termination of the lease.

Equal rental payments are due on January $1$ of each year, beginning in $2014.$

The fair value of the equipment on January $1,2014,$ is $$150,000,$ and its cost is $$120,000.$

The equipment has an economic life of $8$ years, with an unguaranteed residual value of $$10,000.$

Flynn depreciates all of its equipment on a straight$-$line basis.

Bensen set the annual rental to ensure an $11\%$ rate of return. Flynn$\text{'}$s incremental borrowing rate is

$12\%,$ and the implicit rate of the lessor is unknown.

Collectibility of lease payments is reasonably predictable, and no important uncertainties surround

the amount of costs yet to be incurred by the lessor.

Instructions

$($Both the lessor and the lessee's accounting period ends on December $31.)$

$($a$)$ Discuss the nature of this lease to Bensen and Flynn$.$

$($b$)$ Calculate the amount of the annual rental payment.

$($c$)$ Prepare all the necessary journal entries for Flynn for $2014.$

$($d$)$ Prepare all the necessary journal entries for Bensen for $2014.$