At the beginning of the year, OPQ Corp. began to lease a building using the capitalized method ...

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Q:
At the beginning of the year, OPQ Corp. began to lease a building using the capitalized method. The firm is obligated to make a lease payment of $12,000 each year for 7 years with no option to buy it back. The rate implicit in the lease is 9% and the rate applicable to the firm's general debt is 7.5%. What would be the net book value of the capitalized lease at the end of its first year?
a) $63,559
b) $50,329
c) $54,479
d) $58,273
A:

The correct answer is: c)
Step 1: Calculate the Present Value of the lease:
PMT = $12,000; N = 7; I = 7.5%*

Therefore, PV = 63,559
*Note that we have to use the lower of the lease rate or the rate on the firm's general debt.
Step 2: Amortization Rate = 63,559/7 = 9,080
Step 3: Ending Book Value = 63,559 - 9,080 = 54,479


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