Bug Co. leased equipment to Yellow Inc. the equipment has a fair market value of $400,000 and cost the lessor $320,000. The useful life of this equipment is 9 years.

The appropriate interest rate for the lease is 8%.

That equal annual lease payments are made at the beginning of each year. The lease term is five years. There is a bargain purchase option allowing Yellow Inc. the option to purchase the equipment at the end of year 3 for $60,000.

A. How should Bug co. Classify the lease? Why?

B. Determine the annual lease payments, as calculated by the lessor.

C. What amount should the lessee show as a Right of Use asset on their balance sheet?

TABLE 2 Present Value of $1 $1 PV (1+1) 104 1 1.096 1.5% 2.0% 2.5% 3.5% 4,096 4.5% 5.5% 6.06 7,096 8.046 9.09 10.096 11.09 12.04 20.046 1 0.99010 0.98522 098039 097561 0.97087 0.96618 0.96154 0.95694 095238 094787 094340 093458 092593 091743 0.90909 0.90090 089286 0.83333 2 098030 097066 0.96117 095181 0.94260 093351 0.92456 0.91573 0.90703 089845 0.89000 0.87344 0.85734 0.84168 082645 0.81162 0.79719 069444 3 097059 095632094232 092860 091514 090194 0.88900 0.87630 0.86384 085161 033962 0.81630 0.79383 0.77215 0.75131 0.73119 071178 0.57870 4 0 96098 094218 092385 0.90595 085849 0.87144 085480 0.83856 0.52270 0.80722 0.79209 0.76290 0.73503 0.708430.68301 0.65873 0.63552 0.48225 5 095147 0.92826 090573 0.58385 086261 0.84197 0.82193 0.00245 0.78353 076513 0.74726 0.71299 0.68058 0.64993 0.62092 0.59345 0.56743 0.40188 6 0.94205 0.91454 0.88797 0.86230 0.83748 0.81350 0.79031 0.76790 0.74622 0.72525 0.70496 0.66634 0.63017 0.59627 0.56447 0.53464 0.50663 0.33490 7 093272 090103 0.87056 0.34127 081309 0.78599 0.75992 0.73483 0.71068 0.68744 066506 0.62275 0.58349 0.54703 0.51316 0.48166 0.45235 027908 8 092348 0.88771 0.85349 082075 0.78941 0.75941 0.73069 0.70319 0.67684 0.65160 062741 0.58201054027 0.50187 046651 0.43393040388 0.23257 9 091434 0.57459083676 0.80073 0.76642 0.73373 0.70259 0.67290 0.6446! 0.61763 0.59190054393 0.50035 0.46043 042410 0.39092 0.36061 0.19381 10 0.90529 0.86167 0.82035 0.78120 0.74409 0.70892 0.67556 0.64393 061391 0.58543 0.558990.50835 046319 042241 038554 0.35218 0.32197 016151 11 0.89633 0.54893 0.80436 0.76714 0.72242 0.65495 0.64055 0.61620 0.58468 0.55491 0.52679 0.47509 0.42858 0.38753 0.35049 0.31728 0.21748 0.13459 12 0.88745 0.83639 0.76549 0.74356 0.70138 066178 0.62460 0.58966 0.55654 0.52598 0.49097 0.44401039711 0.35553 0.31863 028534 0.25668 0.11216 13 087866 0.12403 0.77303 0.72542 0.68095 0.639-40 0.60057 0.56427 053032 0.49856 0.46884 0.41496 036770 0.32618 0,28966 025751 0.22917 0.09346 14 0.86996 0.81185 0.75786 070773 0.66112 0.61778 0.57748 053997 0.50507 0.47257 0.44230 0.38782 034046 029925 0.26333 0.23199 0.20162 0.07789 15 0.86135 0.79935 0.74301 0.69047 0.641816 059639 0.55526 0.51672 048102 0.4479) 0.41727 036245 0.31524 0 27454 023939 0.20900 0.18270006491 16 0.85282 0.78803 0.72845 0.67362 0.62317 0.57671 0.53391 0.40447 0.45311 0.42458 0.39365 0.33873 0.29119 0.25187 0.21763 0.18819 0.16312 0.05409 17 0.84438 0.77639 0.71416 0.65720 0.60502 0.55720 0.51337 0.47311 0.43630 0.40245 0.37136 0.31659 0.27027033107 0.19754 0.16963 0.14564 0.04502 11 0.83602 0.76491 070016 0.61117 0.56739 0.53836 0.49363045280 041552 038147 035034029586 025025 021199 0.17986 015212 0.19004 0.03756 19 0.82774 0.75361 0.68643 0.62553 0.57029 052016 047464 043330 0.19571 0.16158 033051 027651 0.23171 0.19449 016351 0.13768 0.11611003130 20 0.81954 0.74347 0.67297 0.61027 0.55368 0.50257 0.45639 0.41464 0.37689 034273031180 0.25842 021455 0.17343 0.14864 0.12403 0.10362 003608 21 0.81143 0.73150 0.65978 0.59519 0.53755 0.48557 0.43853 0.39679 0.35894 0.33486 0.29416 0.34151 0.10866 0.16370 0.13513 0.111740.00356 0.03174 24 0.78757 0.69954 062172 0.55288 0.49193 0.43796 0 39012 0.34770 031007 0.27666 0.24098 0.19715 0.15770 0.12640 0.10153 0.00170 0.06588 0.01258 25 0 77977 0.689210609530.53939 0.47761 0.42315 037512 0.33273 029530 026223 0.23300 011425 0.14602 0.11597 0.09230 0.07361 005882 0.01048 25 0.75684 0.65910 057437 0.500 0.43708 0.38165 0.33348 0.29157 0.355090.22312 0.19563 0.15040 0.11591 0.08955 0.00934 0.05382 0.04187 0.00607 29 0.74934 0 64936 056311 0.48866 0.42435 036875 0.32065 0.27902024295 0.21163 0.13456 0.1-4056 0.10733 008215 0.06301 0.04849 0.03738 0.00506 30 0.74192 0.63976 0.55207 0.47674 0.41199 0.35628 0.30832 0.36700 0.23138 0.20064 0.17411 0.13137 0.09938 0.07537 0.05731 0.04368 0.03333 0.00421 31 073458 0.63031 0.54125 0.46511 0.39999 034423 0.29616 0.25550 0.22036 0.19013 0.16425 0.12277 0.09202 0.009150.05210 001935 002980 0.00351 400 67165 0.55126 045289 0.37243 0.30656 025257 0.208290.17193 0.14205 0.11746 0.09722 0.06678 0.04603 0.03184 0.03209 0.01538 0.01075 0.00068