[Nalmarso]

Bush Corporation signed a lease for equipment from EZ Leasing Company on January 1, Year 1, for a period of ten years at $50,000 per year, including insurance of $3,000 and taxes of $2,000 per year. The equipment had a useful life of fifteen years. At the end of the lease, Bush will have the option of buying the equipment outright for a dollar. Bush’s incremental borrowing rate is 8%, and the rate implicit in the lease (which is known to Bush) is 6%. Lease payments are due every year on December 31. The present value of an annuity for various terms and rates are as follows:

6% 8%

10 years 7.360 6.710

15 years 9.712 8.559

On its financial statements for the year ended June 30, Year 1, Bush will display the following:

Accumulated Lease Accrued

Equipment Depreciation Payable Interest

(Points: 10)

$331,200 $11,040 $331,200 $ 9,936

$368,000 $18,400 $306,960 $ 11,040

$301.950 $10,065 $301,950 $ 12,078

$437,040 $14,568 $331,200 $ 9,936

This is a capital lease type of question and the lessee has the bargain option at the end of the lease which means that I need to use the economic life of the asset ( 15 years) to calculate for accumulated equipment and the other items…

can someone please explain to me how to solve this question?

Thanks !

[Anonymous]

first you need to determine the amount of minimum lease pmnt 50000-5000=45000 executory costs are not included

then you need to know what rate to apply. Incremental borrowing rate is used if lessor's implicit rate is not known. In this case you know “rate implicit in the lease (which is known to Bush) is 6%”

take minimum payment 45000, multiply buy 7.360 = 331200

For depreciation use 15 years since there is bargain option (it's assumed that it will be exercised)

is the answer A? 🙂

[jslo123]

Also you use the 7.30 (6% 10 years) because it is that is how long the LEASE is.

You only touch the 15 years when you do depreciation.

AUD - 89
BEC - 92
FAR - 90
REG - 79

LETZ GET IT

[Author]

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