On January $1,2020,$ Pharoah Company leased equipment to Flynn Corporation. The following information pertains to

this lease.

The term of the non$-$cancelable lease is $6$ years. At the end of the lease term, Flynn has the option to purchase

the equipment for $$1,000,$ while the expected residual value at the end of the lease is $$7,000.$

Equal rental payments are due on January $1$ of each year, beginning in $2020.$

The fair value of the equipment on January $1,2020,$ is $$140,000,$ and its cost is $$110,000.$

The equipment has an economic life of $8$ years. Flynn depreciates all of its equipment on a straight$-$line basis.

Pharoah set the annual rental to ensure a $5\%$ rate of return. Flynn$\text{'}$s incremental borrowing rate is $6\%,$ and the

implicit rate of the lessor is unknown.

Collectibility of lease payments by the lessor is probable.

Both the lessor and the lessee's accounting periods end on December $31.$

Click here to view factor tables.

$($For calculation purposes, use $5$ decimal places as displayed in the factor table provided.$)$

$($a$)$

Correct Answer

Your answer is correct.

Discuss the nature of this lease to Pharoah and Flynn$.$

The nature of this lease for Pharoah is a

lease.

The nature of this lease for Flynn is a

lease.

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Solution

List of Accounts

Attempts: $3$ of $3$ used

Question Part Score

$($b$)$

Your answer is incorrect.

Calculate the amount of the annual rental payment. $($Round answer to $0$ decimal places, e$.$g$.5,275.)$

Annual rental payment