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What are the answers? Royals Incorporated leases a piece of equipment to Polar Corporation on January...

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Accounting

What are the answers? Royals Incorporated leases a piece ofequipment to Polar Corporation on January 1, 2017. The leaseagreement called for annual rental payments of $8,648 at thebeginning of each year of the 3-year lease. The equipment has afair value of $35,000, a book value of $20,000, and an economicuseful life of 5 years after which the residual value will be zero.Both parties expect a residual value of $12,500 at the end of thelease term, though this amount is not guaranteed. Royals set thelease payments with the intent of earning a 6% return, and Polar isaware of this rate. There is no bargain purchase option, ownershipof the lease does not transfer at the end of the lease term, andthe asset is not of a specialized nature. PV Annuity Due PVOrdinary Annuity PV Single Sum 6%, 3 periods 2.83339 2.67301 .839626%, 5 periods 4.46511 4.21236 .74726 (

a) Describe the nature of the lease to Polar.

(b) Prepare all necessary journal entries for Polar in 2017.

(c)Show how the rental payment is determined by lessor (showyour works).

(d)Suppose that the residual value is guaranteed by Polar. Allother facts being equal, how would Royals change the amount of theannual rental payment?

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