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Question
1. Five payments of $26,379.74 (a 9% implicit rate) due at the end each year.2. The fair value of the tractor is $100,000.
3. The lease is nonrenewable and the tractor reverts to Star at the end of the lease term.
4. The tractor has a six-year economic life.
5. Hatfield has an excellent credit rating.
6. Star offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer.
On January 1, 2012, Lessor Corporation entered into a lease which was treated as a sales-type lease by Lessor Corporation; the leased asset's book value within Lessor Corporation's financial statements was $350,000 as of January 1, 2012. The lease required the lessee to make ten annual payments of $50,000; the first payment was due at the beginning of the lease term and each January 1 thereafter. The present value of the minimum lease payments was $362,345. The implicit rate of interest, known to the lessee, was 8%, while the lessee's incremental borrowing rate was 10%. The increase in Lessor Corporation's net income for the year ended December 31, 2012 was approximately
A. $12,345.
B. $37,333.
C. $41,333.
D. $24,988.
Answer
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