Question

Koby Co. entered into a capital lease with a vendor for equipment on January 2 for 7 years. The equipment has no guaranteed residual value. The lease required Koby to pay $500,000 annually on January 2, beginning with the current year. The present value of an annuity due for seven years was 5.35 at the inception of the lease. What amount should Koby recognize for the asset?

A. $ 825,000
B. $ 500,000
C. $2,675,000
D. $3,500,000

Answer 1

C. $2,675,000

Step-by-step explanation:

As provided there is no guaranteed amount of residual value. Accordingly it shall be considered $0. Further, the present value of such lease payments is to be considered for recording this as an asset.

This will be recorded at the value of the present value.

The present value of lease payments = $500,000
`*` Present value factor

= $500,000
`*` 5.35 = $2,675,000

This is the amount at which the asset is recorded and then depreciation is charged on it.