On January 1st, 2014, ABC Inc

On January 1st, 2014, ABC Inc.(the lessor) agrees to lease a piece of specialized piece of machinery to DEF Inc.(the lessee) for 5 years.ABC Inc.is a financial intermediary specializing in leasing arrangements such as the one described below.Details are as follows: Fair value of machinery at inception of the lease: $100,000.Lease term: 5 years (no bargain renewal terms) .
Executory costs of $10,000 are reimbursed by the lessee.
5 Annual lease payments of $23,000 each are made on January 1st of each year starting on January 1st, 2014.
Bargain purchase option at end of lease: $5,000.It is estimated that the equipment will have a fair value of $10,000 at the end of the lease.
Economic life of the asset is 10 years, after which the equipment will be worthless.Straight-line depreciation applies.
ABC's implicit interest rate with respect to this lease is 10%.This is rate is known by DE Inc.
DEF Inc's incremental borrowing rate is 9%.
-What would be the amount of finance revenue recorded by ABC Inc.in the first year of the lease (rounded) ?

A) $7,601
B) $9,901
C) $10,000
D) $7,700

Correct Answer:

Verified

Unlock this answer now
Get Access to more Verified Answers free of charge

Access For Free