On January 1, 2011, Adams Corporation signed a 5-year non-cancelable lease for a machine. The terms of

Question:

On January 1, 2011, Adams Corporation signed a 5-year non-cancelable lease for a machine. The terms of the lease called for Adams to make annual payments of $9,968 at the beginning of each year, starting January 1, 2011. The machine has an estimated useful life of 6 years and a $5,000 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Adams uses the straight-line method of depreciation for all of its plant assets. Adams’s incremental borrowing rate is 10%, and the Lessor’s implicit rate is unknown.

(a) What type of lease is this? Explain.

(b) Compute the present value of the minimum lease payments.

Depreciation
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