P3 entered into a lease on December 31, 2020, with Gary’s Gag Garage, Inc. (G3) a company that manufactures magic tricks, gag gifts, and other lighthearted products. P3 plans to lease a machine from G3 that produces fake spiders and snakes that will be used for their safari adventures. The terms of the lease are as follows:

• The term of the non-cancelable lease is 10 years with no renewal or bargain purchase option. The remaining economic life of the machine is 12 years and it is expected to have a $20,000 residual value at the end of the lease term through P3 is NOT guaranteeing the residual.

• The fair value of the machine was $525,176 at the commencement of the lease.

• Annual payments are required to be made on December 31, starting in 2020.

• P3 depreciates similar assets using straight-line depreciation.

• P3‘s borrowing rate is 8% per year and the lessor’s rate implicit in the lease is not known.

Answer rating: 100% (QA)

Computation of annual Lease Payment to the Lessor F... View the full answer