On January 1, 2019, Murray Manufacturing Leased a Building for Use

On January 1, 2019, Murray Manufacturing leased a building for use in its operations from Associated Realty. The 7-year, noncancellable lease requires annual lease payments of $17,000, beginning January 1, 2019, and at each December 31 thereafter through 2024. The lease payment includes costs related to property taxes of $2,000. They also include payments for common area maintenance. The observable standalone price for the lease (including the property taxes) is $15,000 and the observable standalone price for the common area maintenance is $4,000.
In addition, Murray agrees to pay insurance on the building. Murray pays the insurance each year when it receives an invoice from Associated Realty for the insurance amount. On December 15, 2019, Murray was billed and paid $2,500 for this insurance. Murray does not make the election to account for each separate lease component, along with its associated nonlease components, as a single lease component.
The lease agreement does not transfer ownership, nor does it contain a purchase option. The building has a fair value of $87,000 and an estimated remaining life of 8 years. Associated Realty's implicit rate of 10% is known to Murray. Round percentages to one decimal place.
What amount of the $17,000 lease payment is used to compute the lease obligation?

A) $17,000
B) $13,000
C) $13,413
D) $12,938

Correct Answer:

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