Gage Co. purchases land and constructs a service station and car wash for a total of $540,000.
Question:
Gage Co. purchases land and constructs a service station and car wash for a total of $540,000. At January 2, 2020, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $600,000 and immediately leased from the oil company by Gage. Fair value of the land at time of the sale was $60,000. The lease is a 10-year, non-cancelable lease. Gage uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to Gage at termination of the lease. A partial amortization schedule for this lease is as follows:
Payments | Interest | Amortization | Balance |
Jan. 2, 2020 | $600,000 | .00 |
Dec. 31, 2020 | $97,646.71 | $60,000.00 | $37,646.71 | 562,353.29 |
Dec. 31, 2021 | 97,646.71 | 56,235.33 | 41,411.38 | 520,941.91 |
Dec. 31, 2022 | 97,646.71 | 52,094.19 | 45,552.52 | 475,389.39 |
What is the discount rate implicit in the amortization schedule presented above?
Managerial Accounting Tools for business decision making
ISBN: 978-0470477144
5th edition
Authors: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso