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


MORE FAQS

  1. You are currently reviewing the following information for JKL Corp ...

  2. At the beginning of the year, HIJ Corp. began to lease new equipment ...

  3. At the beginning of the year, ABC Corp. began to lease a major piece of equipment ...

  4. Why might a bond agreement limit the amount of assets that the firm can lease?

  5. How have low interest rates affected lease rates in the automotive sector?

  6. What are the differences between single, double and triple-net leases?

  7. How does the value of the real estate impact the value of a triple net (NNN) lease?

  8. What kinds of real estate transactions use triple net (NNN) leases?

  9. What is the importance of residual value in an automobile lease?

  10. What are typical forms of long-term debt for a public company?

  11. I have a small business, and I'm considering setting up an SEP IRA. What are leased employees? Does this term refer to outside contractors who receive 1099-Rs? If so, how would the 5305-SEP need to be worded to make it acceptable to the IRS?

  12. Joe just bought a house for $750,000, of which 65% was financed with a 20 year ...

  13. If a telecommunication company wants to build a tower on my land how much should I charge?

  14. A 10-year, 8% coupon bond is currently trading at 98.5 of par ...

  15. What are the three "nets" of an NNN lease?

  16. How many attempts at each CFA exam is a candidate permitted?

  17. Are hedge funds regulated by FINRA?

  18. Do financial advisors need to pass the Series 7 exam?

  19. Do financial advisors need to be approved by FINRA?

  20. How does a broker decide which customers are eligible to open a margin account?

RELATED FAQS

  1. You are currently reviewing the following information for JKL Corp ...

    Free info on financial certification exams including study guides, exam questions, and much more!
  2. At the beginning of the year, HIJ Corp. began to lease new equipment ...

    The correct answer is: b) Total Lease Payment = Interest expense + Principal repayment Step 1: Interest expense = 8.5% of ...
  3. At the beginning of the year, ABC Corp. began to lease a major piece of equipment ...

    The correct answer is: A) Under the capitalized lease method, the lessee must treat the asset as if it was purchased with ...
  4. Why might a bond agreement limit the amount of assets that the firm can lease?

    Bond covenants can limit the amount of leases a company can have because leasing contracts are a form of debt. Taking on ...
  5. How have low interest rates affected lease rates in the automotive sector?

    Find out how and why lower interest rates for leasing new automobiles have helped spur more consumers to lease cars instead ...
  6. What are the differences between single, double and triple-net leases?

    Learn the ins and outs of net lease agreements, including the key differences between single net, double net and triple net ...
RELATED TERMS
  1. Capitalized Lease Method

    An accounting approach that identifies a company's lease obligation ...
  2. Capital Lease

    A lease considered to have the economic characteristics of asset ...
  3. Closed-End Lease

    A rental agreement that puts no obligation on the lessee (the ...
  4. Operating Lease

    A contract that allows for the use of an asset, but does not ...
  5. Leasehold

    An accounting term used to classify an asset on a company's balance ...
  6. Lease Utilization

    A financial ratio that measures how much a company uses leasing ...
Trading Center