Length of the Lease: Useful Life of the Equipment: Value of Equipment on 1/1/17 Equipment reverts to Norton on December 31, 2020 Diamond Guarantees that Equipment will be worth $ 100,000 on December 31, 2020 4 years 7 years $ 800,000 Diamond's Incremental Borrowing Rate Norton's Implicit Rate of Return 10% b: Dion
Length of the Lease: Useful Life of the Equipment: Value of Equipment on 1/1/17 Equipment reverts to Norton on December 31, 2020 Diamond Guarantees that Equipment will be worth $ 100,000 on December 31, 2020 4 years 7 years $ 800,000 Diamond's Incremental Borrowing Rate Norton's Implicit Rate of Return 10% b: Dion
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
On January 1, 2017, Diamond Company agreed to lease some equipment from Norton Machinery. Relevant information is in the photo.
Assume that anyone who depreciates the equipment will use the straight-line method, and that the equipment will havea salvage value of $ 0 on December 31, 2023.
A. Assuming that lease payments are made at the start of the year, what is the amount of the annual lease payment that will enable Norton to earn their implicit rate of return ?
Transcribed Image Text:Inception of Lease:
Length of the Lease:
Useful Life of the Equipment:
Value of Equipment on 1/1/17
Equipment reverts to Norton on December 31, 2020
Diamond Guarantees that Equipment will be worth $ 100,000 on
December 31, 2020
Diamond's Incremental Borrowing Rate
Norton's Implicit Rate of Return
(assume unknown by Diamond)
January 1, 2017
4 years
7 years
$ 800,000
10%
8%
Expert Solution
Step 1
Steps to calculate lease payments
1)Determine the property that are to be leased.
2)Find out the interest rate on which lease is based on.
3)Decide the lease term for the property.
4)Divide the value of property by present value of the factor of borrowing rate.
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