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3) The Truck Rental Company (as lessor) leases a new truck to the Speedy Delivery Company (as lessee) for a period of 10 years. The
3) The Truck Rental Company (as lessor) leases a new truck to the Speedy Delivery Company (as lessee) for a period of 10 years. The agreement requires annual lease payments of $500, payable in advance. In essence, the first payment is made immediately when the lease agreement is signed; the second lease payment is made at the end of the first year, the third lease payment is made at the end of the second year, etc. Speedy (as lessee) does not know the Truck Rental Company's implicit interest rate. Consequently, it discounts the required lease payments at its own incremental borrowing rate of 12% thus giving a present value of minimum lease payments of $3,164 (this amount is rounded up to the nearest $1 for ease of calculations and should be used in this question). If Speedy (as lessee) classifies the lease as a Capital Lease (and accounts for it using the financing method), which of the following is a correct statement: A. The interest expense recognized during the first year of the lease will be $320. B. The reported value of the lease payable (obligation under capital lease) at the end of the first year after the second payment has been made will be $2,544 (rounded up to the nearest $1). C. Amortization of the leased truck (based on the straight-line depreciation method) will amount to $266 each year over the 10-year term of the lease. D. The total lease related expense (i.e., interest plus depreciation) to be reported during the first year of the lease will be $586. E. The total lease related expense (.e., interest plus depreciation) to be reported over the 10- year term of the lease will be $6,364
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