Assume that on January 1, 2021, Fredder Corporation sells equipment to Finance Co. for $1,700,000 and immediately leases back the equipment. The relevant information is as follows. 1. The equipment was carried on Fredder's books at a value of $1,500,000. 2. The term of the non-cancelable lease is 3 years; title will not transfer to Fredder, and the expected residual value at the end of the lease is $125,000, all of which is unguaranteed. 3. The lease agreement requires equal rental payments of $277,635 at the beginning of each year. 4. The incremental borrowing rate for Fredder is 7%. Fredder is aware that Finance set the annual rental to ensure a rate of return of 7%. 5. The equipment has a fair value of $1,700,000 on January 1, 2021, and an estimated economic life of 10 years.
Assume that on January 1, 2021, Fredder Corporation sells equipment to Finance Co. for $1,700,000 and immediately leases back the equipment. The relevant information is as follows. 1. The equipment was carried on Fredder's books at a value of $1,500,000. 2. The term of the non-cancelable lease is 3 years; title will not transfer to Fredder, and the expected residual value at the end of the lease is $125,000, all of which is unguaranteed. 3. The lease agreement requires equal rental payments of $277,635 at the beginning of each year. 4. The incremental borrowing rate for Fredder is 7%. Fredder is aware that Finance set the annual rental to ensure a rate of return of 7%. 5. The equipment has a fair value of $1,700,000 on January 1, 2021, and an estimated economic life of 10 years. What type of lease is this for Fredder? What type of lease is this for Finance? Explain briefly. Prepare all necessary journal entries for the lessee for 2021. Prepare the 1/1/22
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