Question

Wildhorse Company leases a machine from Vollmer Corp. under an agreement which meets the criteria to be a capital lease for Wildhorse. The 6-year lease requires payment of $167000 at the beginning of each year, including $24700 per year for maintenance, insurance, and taxes. The incremental borrowing rate for the lessee is 11%; the lessor’s implicit rate is 9% and is known by the lessee. The present value of an annuity due of 1 for six years at 11% is 4.69590. The present value of an annuity due of 1 for six years at 9% is 4.88965. Wildhorse should record the leased asset at

$816572.

$695797.

$668227.

$784215.

Answer 1

The answer is $816,572

Step-by-step explanation:

Solution

Recall that:

A 6 year lease payment requires = $167000 at the beginning of the year

per year for a maintenance, insurance and taxes = $24700

The increment borrowing rate of lease = 11%

lessor's implicit rate = 9%

The present value of annuity due of 1 for 6 years is at 11% = 4.69590

The The present value of annuity due of 1 for 6 years is at 9% = 4.88965

Now,

The Lease asset = Annual payment * present value of annuity due of 1 for six years at 9%

= 167000 X 4.88965 = 816,572

Therefore, Wildhorse should record the leased asset at $816,572