(The effect of interest rates on capital leases, LO 5) On June 1, 2006 Grumbler Corp. (Grumbler) signed a six-year lease for heavy equipment. The lease requires Grumbler to make annual lease payments of $250,000 on May 31 of each year beginning in 2007. The lease is to be treated as a capital lease.

Required:

a. Indicate the amount that would be recorded for heavy equipment and for the lease liability on June 1, 2006 assuming:

i. The appropriate interest rate for the lease was 8%.

ii. The appropriate interest rate for the lease was 10%.

ili. The appropriate interest rate for the lease was 12%.

b. Indicate the annual amortization expense for the heavy equipment, assuming straight-line amortization over six years and assuming:

i. The appropriate interest rate for the lease was 8%.

ii. The appropriate interest rate for the lease was 10%.

iii. The appropriate interest rate for the lease was 12%.

c. Indicate the interest expense pertaining to the lease in the fiscal year ended May 31, 2007, assuming:

i. The appropriate interest rate for the lease was 8%.

ii. The appropriate interest rate for the lease was 10%.

iii. The appropriate interest rate for the lease was 12%.