Question
Colorado Inc. leased a new front-end loader to Cho Construction under a 4-year, non-cancelable contract starting January 1, 2020. Terms of the lease require payments
Colorado Inc. leased a new front-end loader to Cho Construction under a 4-year, non-cancelable contract starting January 1, 2020. Terms of the lease require payments of $30,507 each January 1, starting January 1, 2020. The front-end loader has an estimated life of 9 years, a fair value of $175,000, and a cost to Colorado of $140,000. The estimated fair value of the front-end loader is expected to be $36,000 (unguaranteed) at the end of the lease term. No bargain purchase or renewal options are included in the contract, and it is not a specialized asset. Cho uses straight- line amortization for all similar leased assets, and Colorado depreciates the asset on a straight- line basis with a salvage value of $10,000. Both Colorado and Cho adjust and close books annually on December 31. Collectability of the lease payments is probable. Chos incremental borrowing rate is 9%, and Colorados implicit interest rate of 8% is unknown to Cho.
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