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

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question

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 

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps with 1 images

Blurred answer
Knowledge Booster
Lease accounting
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education