Merchant Company found themselves in need of cash. In an effort to shore up their financial situation they sold land to Natalie Company for $3.5 million and immediately leased it back.
1) The land was recorded on Merchant's book at $1.5 million
2) The term of the noncancelable lease is 20 years.
3) The lease agreement requires equal rental payments of $439,516 at the end of each year.
4) The incremental borrowing rate of Merchant's is 12% but the annual rental rate of 11% was set by Natalie, and Merchant is aware of the rate.
5) Merchant pays all executory costs which amount to $11,500 per year which includes taxes and insurance.
6) There are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor, and the collectibility is reasonably assured.
7) The land's fair value is $3.5 million.
8) Natalie provided Merchant with the option to purchase the land at the end of the 20 years for $1,000.

Question

Merchant Company found themselves in need of cash. In an effort to shore up their financial situation they sold land to Natalie Company for $3.5 million and immediately leased it back. 
1) The land was recorded on Merchant's book at $1.5 million
2) The term of the noncancelable lease is 20 years. 
3) The lease agreement requires equal rental payments of $439,516 at the end of each year. 
4) The incremental borrowing rate of Merchant's is 12% but the annual rental rate of 11% was set by Natalie, and Merchant is aware of the rate. 
5) Merchant pays all executory costs which amount to $11,500 per year which includes taxes and insurance.
6) There are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor, and the collectibility is reasonably assured. 
7) The land's fair value is $3.5 million. 
8) Natalie provided Merchant with the option to purchase the land at the end of the 20 years for $1,000.

Quizplus · Accepted Answer

The Answer of Merchant Company found themselves in need of cash. In an effort to shore up their financial situation they sold land to Natalie Company for $3.5 million and immediately leased it back. 
1) The land was recorded on Merchant's book at $1.5 million
2) The term of the noncancelable lease is 20 years. 
3) The lease agreement requires equal rental payments of $439,516 at the end of each year. 
4) The incremental borrowing rate of Merchant's is 12% but the annual rental rate of 11% was set by Natalie, and Merchant is aware of the rate. 
5) Merchant pays all executory costs which amount to $11,500 per year which includes taxes and insurance.
6) There are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor, and the collectibility is reasonably assured. 
7) The land's fair value is $3.5 million. 
8) Natalie provided Merchant with the option to purchase the land at the end of the 20 years for $1,000.

Merchant Company Found Themselves in Need of Cash