Question 6

Eubank Company, as lessee, enters into a lease agreement on July 1, 2014, for equipment. The following data are relevant to the lease agreement: The term of the noncancelable lease is 3 years, with no renewal option. Payments of $784,100 are due on July 1 of each year. The fair value of the equipment on July 1, 2014 is $2,163,418. The equipment has an economic life of 6 years with no salvage value. Eubank depreciates similar machinery it owns on the sum-of-the-years'-digits basis. The lessee pays all executory costs. Eubank's incremental borrowing rate is 11% per year. The lessee is aware that the lessor used an implicit rate of 9% in Computing the lease payments (present value factor for 3 periods at 9%, 2.75911; at 11%, 2.71252