Question
Bramble Industries and Sunland Inc. enter into an agreement that requires Sunland Inc. to build three diesel-electric engines to Brambles specifications. Upon completion of the
Bramble Industries and Sunland Inc. enter into an agreement that requires Sunland Inc. to build three diesel-electric engines to Brambles specifications. Upon completion of the engines, Bramble has agreed to lease them for a period of 10 years and to assume all costs and risks of ownership. The lease is non-cancelable, becomes effective on January 1, 2017, and requires annual rental payments of $397,478 each January 1, starting January 1, 2017. Brambles incremental borrowing rate is 8%. The implicit interest rate used by Sunland and known to Bramble is 6%. The total cost of building the three engines is $2,700,000. The economic life of the engines is estimated to be 10 years, with residual value set at zero. Bramble depreciates similar equipment on a straight-line basis. At the end of the lease, Bramble assumes title to the engines. Collectibility of the lease payments is probable.
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