Question

Lessor Computations and Entries, Sales-Type Lease with Guaranteed Residual Value) Amirante Inc. manufactures an X-ray machine with an estimated life of 12 years and leases it to Chambers Medical Center for a period of 10 years. The normal selling price of the machine is \(411,324, and its guaranteed residual value at the end of the noncancelable lease term is estimated to be \)15,000. The hospital will pay rents of \(60,000 at the beginning of each year and all maintenance, insurance, and taxes. Amirante Inc. incurred costs of \)250,000 in manufacturing the machine and $14,000 in negotiating and closing the lease. Amirante Inc. has determined that the collectibility of the lease payments is reasonably predictable, that there will be no additional costs 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.

(3) Cost of sales.

Short answer

The lease is a sale-type lease.

Step-by-step solution

Meaning of Rental Payments

Rental payment is a payment made by one tenant in exchange for the rightto occupy or use another's the property at predetermined intervals, usually in an amount established by contract.

Explaining the nature of the lease in relation to the lessor

The lease is a sale-type lease as it meets the following condition

1. the lease term is for 83 percent (10$÷$12) of the economic life of the leased asset,
2. the present value of the minimum lease payments exceeds 90 percent of the fair value of the leased property,
3. the collectability of the lease payments is reasonably predictable and there are no uncertainties as to reimbursable costs yet to be incurred by the lessor, and
4. The lease provides the lessor with manufacturing capabilities.

Computation of amount of cost of sales.

Cost of sales is the cost of manufacturing the x-ray machine	$250,000