Northern Equipment leases cooling towers to Warmup Corporation. The equipment is not specialized and is delivered on January 1, 2023. The fair value of the equipment is $180,000. The cost of the equipment to Northern is $170,000 and the expected life of the testing equipment is 8 years. At the end of the useful life, it is expected that the equipment will have a residual value of $20,000, although the lessee guarantees only $15,000. Northern incurs initial direct costs of $20,000, which they elect to expense. The lease term for the equipment is 8 years, with the first payment due upon delivery, and seven subsequent annual payments beginning on December 31, 2023 and ending on December 31, 2029. Northern's implicit rate is 8% and they expect that collection of the $30,000 payments is probable. The lease is properly classified as a sales-type lease. What amount will be recorded for cost of goods sold? (Round any present value calculations to the nearest dollar, and round any percentages two decimal places, X.XX%.)
Northern Equipment leases cooling towers to Warmup Corporation. The equipment is not specialized and is delivered on January 1, 2023. The fair value of the equipment is $180,000. The cost of the equipment to Northern is $170,000 and the expected life of the testing equipment is 8 years. At the end of the useful life, it is expected that the equipment will have a residual value of $20,000, although the lessee guarantees only $15,000. Northern incurs initial direct costs of $20,000, which they elect to expense. The lease term for the equipment is 8 years, with the first payment due upon delivery, and seven subsequent annual payments beginning on December 31, 2023 and ending on December 31, 2029. Northern's implicit rate is 8% and they expect that collection of the $30,000 payments is probable. The lease is properly classified as a sales-type lease. What amount will be recorded for cost of goods sold? (Round any present value calculations to the nearest dollar, and round any percentages two decimal places, X.XX%.)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
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Transcribed Image Text:Northern Equipment leases cooling towers to Warmup Corporation. The equipment is not specialized and is delivered on January 1, 2023. The fair value of the equipment is $180,000.
The cost of the equipment to Northern is $170,000 and the expected life of the testing equipment is 8 years. At the end of the useful life, it is expected that the equipment will have a
residual value of $20,000, although the lessee guarantees only $15,000. Northern incurs initial direct costs of $20,000, which they elect to expense. The lease term for the equipment is
8 years, with the first payment due upon delivery, and seven subsequent annual payments beginning on December 31, 2023 and ending on December 31, 2029. Northern's implicit rate
is 8% and they expect that collection of the $30,000 payments is probable. The lease is properly classified as a sales-type lease.
What amount will be recorded for cost of goods sold? (Round any present value calculations to the nearest dollar, and round any percentages two decimal places, X.XX%.)
A. $183,851
8 $167,642
OG. $180,000
D. $172,358
CO
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