Question

(Lessor Computations and Entries, Sales-Type Lease with Unguaranteed Residual Value) George Company manufactures a check-in kiosk with an estimated economic life of 12 years and leases it to National Airlines for a period of 10 years. The normal selling price of the equipment is \(278,072, and its unguaranteed residual value at the end of the lease term is estimated to be \)20,000. National will pay annual payments of \(40,000 at the beginning of each year and all maintenance, insurance, and taxes. George incurred costs of \)180,000 in manufacturing the equipment and $4,000 in negotiating and closing the lease. George has determined that the collectibility of the lease payments is reasonably predictable, that no additional costs will be incurred, and that the implicit interest rate is 10%.

Instructions

(a) Discuss the nature of this lease in relation to the lessor and compute the amount of each of the following items.

(2) Sales price.

Short answer

The sales price is $270,361.

Step-by-step solution

Meaning of Sales Price

The discounted price at which products or services are sold is known as a sale price. This pricing is normally only available for a limited time, mainly to boost sales during a sluggish season or to clear off surplus inventory.

Explaining the nature of the lease in relation to the lessor

The lease is a sales-type lease because:

(1) The lease period exceeds 75% of the asset's expected economic life (10/12 = 83%),

(2) Payment collectability is fairly ensured and no further expenditures are paid, and

(3) George Company made a profit in addition to the financing fee.

Computing the amount of sales price

The sale price is $270,361 (the present value of the ten-year lease payments), or the initial PV of $278,072 is less than the PV of the unguaranteed residual value of $7,711.