Each of these situations are independent. Lease payments are made at the beginning of the year. The lessee knows the lessor's rate of return. All leases may be capitalized by both the lessee and the lessor.

1. What factors would you look at to determine whether the lease was appropriately capitalized?
For each situation, determine:
2. The annual lease payments as computed by the lessor.
3. The amount the lessee would record as cost for the leased asset.

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1 2 3 Lease term (years) 10 4 Lessor's rate of return 10% 8% 12% Lessee's incremental borrowing rate Fairvalue of the leased asset 9% 9% 11% $500,000 $890,000 $175,000