Question
West Company leased a new machine from South Company on May 1, 2014 under a lease with the following information: Lease term: 10 years Annual
West Company leased a new machine from South Company on May 1, 2014 under a lease with the following information:
Lease term: 10 years
Annual rental payable at beginning of each lease year: $40,000
Useful life of machine: 12 years
Implicit interest rate: 14%
Present value factor for an annuity of 1 in advance for 10 periods at 14%: 5.95
Present value factor for 1 for 10 periods at 14%: 0.27
West has the option to purchase the machine on May 1, 2024 by paying $50,000, which approximates the expected fair value of the machine on the option exercise date. On May 1, 2014, East should record a capitalized lease asset of:
a. $251,500
b. 238,000
c. $224,500
d. 198,000
Please use current lease accounting rules to answer this question.
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