Capital Lease Method (Accounting by the Lessee)

• Caterpillar signed a lease arrangement for an equipment with Sterling Corporation on 1/1/17 on the following terms:
• Lease term is 5 years, non-cancellable, requiring annual payments of 25,981.62 at the beginning of each year (annuity due) (PVADF=4.16986)
• The equipment has a fair value of 100,000 on 1/1/17, useful life of 5 years, and no residual value
• Sterling pays all executory costs to third parties except for 2,000 in property taxes that is included in the lease payments
• Sterlings incremental borrowing rate is 11%
• Sterling uses straight line depreciation
• Caterpillar sets the annual rental to earn a 10% rate of return and Sterling knows about it.