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Assume that on December 31, 2016, Waste Management, Inc. signs an 8-year noncancelable lease agreement to lease a building from Reyes Warehouse Company. The following
Assume that on December 31, 2016, Waste Management, Inc. signs an 8-year noncancelable lease agreement to lease a building from Reyes Warehouse Company. The following information pertains to this lease agreement.
1. | The agreement requires equal rental payments of $73,530 beginning on December 31, 2016. | ||
2. | The fair value of the building on December 31, 2016, is $465,000. | ||
3. | The building has an estimated economic life of 10 years, a guaranteed residual value at the end of 8 years of $16,000, and an expected residual value of $9,000. Waste Management depreciates similar buildings using the straight-line method. | ||
4. | The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor. | ||
5. | Waste Managements incremental borrowing rate is 8% per year. The lessors implicit rate is not known by Waste Management. |
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