On January 1, 2021, Shadow Industries (lessor) leased equipment to Bone Co. (lessee) for a 5-year period under non-cancelable agreement, after which the leased asset will revert back to Shadow Industries. The equipment costs Shadow $660,000 and normally sells for $744,388. Equal payments under the lease are $160,000 and are due on December 31 of each year, with the first payment made on January 1, 2021. The equipment has a useful life of 6 years. The equipment’s residual value is $80,000 at the end of the lease term. The rate implicit in the lease used by the Shadow is 8%, Bone’s incremental borrowing rate is 10% and lessee is aware of lessor’s rate. What amount would Bone record for the right-of-use asset at inception of the agreement? A. $689,941. B. $716,838. C. $744,388. D. $800,000
On January 1, 2021, Shadow Industries (lessor) leased equipment to Bone Co. (lessee) for a 5-year period under non-cancelable agreement, after which the leased asset will revert back to Shadow Industries. The equipment costs Shadow $660,000 and normally sells for $744,388. Equal payments under the lease are $160,000 and are due on December 31 of each year, with the first payment made on January 1, 2021. The equipment has a useful life of 6 years. The equipment’s residual value is $80,000 at the end of the lease term. The rate implicit in the lease used by the Shadow is 8%, Bone’s incremental borrowing rate is 10% and lessee is aware of lessor’s rate. What amount would Bone record for the right-of-use asset at inception of the agreement? A. $689,941. B. $716,838. C. $744,388. D. $800,000
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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On January 1, 2021, Shadow Industries (lessor) leased equipment to Bone Co. (lessee) for a 5-year period under non-cancelable agreement, after which the leased asset will revert back to Shadow Industries.
- The equipment costs Shadow $660,000 and normally sells for $744,388.
- Equal payments under the lease are $160,000 and are due on December 31 of each year, with the first payment made on January 1, 2021.
- The equipment has a useful life of 6 years.
- The equipment’s residual value is $80,000 at the end of the lease term.
- The rate implicit in the lease used by the Shadow is 8%, Bone’s incremental borrowing rate is 10% and lessee is aware of lessor’s rate.
What amount would Bone record for the right-of-use asset at inception of the agreement?
A. $689,941.
B. $716,838.
C. $744,388.
D. $800,000
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