Question 30

Cullumber, Inc. leased equipment from Tower Company under a 4-year lease requiring equal annual payments of $354152, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4 year useful life and no salvage value. Cullumber, Inc.'s incremental borrowing rate is 11% and the rate implicit in the lease (which is known by Cullumber, Inc.) is 9%. Assuming that this lease is properly classified as a capital lease, what is the amount of principal reduction recorded when the second lease payment is made in Year 2?

PV Annuity Due PV Ordinary Annuity

9%, 4 periods 3.53129 3.23972

11%, 4 periods 3.44371 3.10245

a)$250890

b)$273471

c)$209723

d)$354152