Question
On January 1, 2018, Carla Vista, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease
On January 1, 2018, Carla Vista, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the beginning each year. (b) The fair value of the building on January 1, 2018 is $6350000; however, the book value to Holt is $5300000. (c) The building has an estimated economic life of 10 years, with no residual value. Carla Vista depreciates similar buildings using the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Carla Vistas incremental borrowing rate is 12% per year. Holt Warehouse Co. set the annual rental to insure a 12% rate of return. The implicit rate of the lessor is known by Carla Vista, Inc. (f) The yearly rental payment includes $15700 of executory costs related to taxes on the property.
| Future Value of Ordinary Annuity of 1 | |||||
| Period | 5% | 6% | 8% | 10% | 12% |
| 1 | 1.00000 | 1.00000 | 1.00000 | 1.00000 | 1.00000 |
| 2 | 2.05000 | 2.06000 | 2.08000 | 2.10000 | 2.12000 |
| 3 | 3.15250 | 3.18360 | 3.24640 | 3.31000 | 3.37440 |
| 4 | 4.31013 | 4.37462 | 4.50611 | 4.64100 | 4.77933 |
| 5 | 5.52563 | 5.63709 | 5.86660 | 6.10510 | 6.35285 |
| 6 | 6.80191 | 6.97532 | 7.33592 | 7.71561 | 8.11519 |
| 7 | 8.14201 | 8.39384 | 8.92280 | 9.48717 | 10.08901 |
| 8 | 9.54911 | 9.89747 | 10.63663 | 11.43589 | 12.29969 |
| 9 | 11.02656 | 11.49132 | 12.48756 | 13.57948 | 14.77566 |
| 10 | 12.57789 | 13.18079 | 14.48656 | 15.93743 | 17.54874 |
| Present Value of an Annuity Due of 1 | |||||||||||
| Period | 5% | 6% | 8% | 10% | 12% | ||||||
| 1 | 1.00000 | 1.00000 | 1.00000 | 1.00000 | 1.00000 | ||||||
| 2 | 1.95238 | 1.94340 | 1.92593 | 1.90909 | 1.89286 | ||||||
| 3 | 2.85941 | 2.83339 | 2.78326 | 2.73554 | 2.69005 | ||||||
| 4 | 3.72325 | 3.67301 | 3.57710 | 3.48685 | 3.40183 | ||||||
| 5 | 4.54595 | 4.46511 | 4.31213 | 4.16986 | 4.03735 | ||||||
| 6 | 5.32948 | 5.21236 | 4.99271 | 4.79079 | 4.60478 | ||||||
| 7 | 6.07569 | 5.91732 | 5.62288 | 5.35526 | 5.11141 | ||||||
| 8 | 6.78637 | 6.58238 | 6.20637 | 5.86842 | 5.56376 | ||||||
| 9 | 7.46321 | 7.20979 | 6.74664 | 6.33493 | 5.96764 | ||||||
| 10 | 8.10782 | 7.80169 | 7.24689 | 6.75902 | 6.32825 | ||||||
What is the annual lease payment excluding executory costs? (Rounded to the nearest dollar.)
a. $1019137
b. $1003437
c. $987737
d. $368437
Please help ASAP. Thank you very much.
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Financial Accounting and Reporting
Authors: Barry Elliott, Jamie Elliott
14th Edition
978-0273744535, 273744445, 273744534, 978-0273744443
