At the beginning of the year, ABC Corp. began to lease a major piece of equipment. The lease payment is $10,000 per year. However, using a discount rate of 15%, ABC's management computed the present value of this lease obligation to be $35,000. If the equipment is depreciated by a rate of $7,000 per year, and the firm uses the capitalized lease method, how much reduction in pretax income will the leasing of this equipment result in during its first year?
D) $ 7,000
The correct answer is: A)
Under the capitalized lease method, the lessee must treat the asset as if it was purchased with the use of debt financing. Therefore, the lessee must record a depreciation amount to account for the asset, and an interest expense to account for the debt. Therefore, total recorded expenses are $7,000 + [15% of $35,000] = $12,250. Thus, this is also the amount by which pretax income will be lowered.
Free info on financial certification exams including study guides, exam questions, and much more!
The correct answer is d) When the specialist gave the floor broker the quote of “59.20 to 35; 6 by 11,” the quote meant ...
The correct answer is c When the firm is a market maker in the stock then it must act as a principle. Principal is the main ...
The correct answer is c). Early withdrawal from a non-qualified annuity--prior to age 59½, except for death or disability, ...
- No results found.