Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease includes a guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessor’s implicit lease rate, known to the lessee, is 10%.  The lessor and the lessee use ASC 842 guidelines for lease accounting. Present value interest factors are:   10% 12% PV factor of $1 for 10 periods 0.38554 0.32197 PV factor for ordinary annuity for 10 periods 6.14457 5.65022   Upon acquisition, the leased equipment will be valued on Pepper’s balance sheet at: Multiple Choice   A. $144,475.   B. $157,469.   C. $175,000.   D. $250,000.

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Chapter1: Financial Statements And Business Decisions
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Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease includes a guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessor’s implicit lease rate, known to the lessee, is 10%.  The lessor and the lessee use ASC 842 guidelines for lease accounting.

Present value interest factors are:

  10% 12%
PV factor of $1 for 10 periods 0.38554 0.32197
PV factor for ordinary annuity for 10 periods 6.14457 5.65022
 

Upon acquisition, the leased equipment will be valued on Pepper’s balance sheet at:

Multiple Choice

 
A. $144,475.
 
B. $157,469.
 
C. $175,000.
 
D. $250,000.

 

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