2. Henderson Engineering Ltd. just leased a computer-aided design system for five years with annual payments of
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2. Henderson Engineering Ltd. just leased a computer-aided design system for five years with annual payments of $12,000 payable at the end of each year. The lease contains a provision that allows Henderson to purchase the machine at its fair market value as used equipment when the lease expires. Industry data indicate that systems like these normally last for about eight years. Henderson could have purchased the machine for $50,000 with money borrowed at 9%.
Does Henderson have to capitalize the lease on its balance sheet? Why?
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