Question: On January 1, 2011, Day Corp. entered into a ten-year lease agreement with Ward, Inc. for industrial equipment. Annual lease payments of $10,000 are payable

On January 1, 2011, Day Corp. entered into a ten-year lease agreement with Ward, Inc. for industrial equipment.

Annual lease payments of $10,000 are payable at the end of each year. Day knows that the lessor expects a 10% return on the lease. Day has a 12% incremental borrowing rate.

The equipment is expected to have an estimated useful life of ten years. In addition, a third party has guaranteed to pay Ward a residual value of $5,000 at the end of the lease.

The present value of an ordinary annuity of $1 at 12% for ten years is 5.6502 10% for ten years is 6.1446 The present value of $1 at 12% for ten years is .3220 10% for ten years is .3855 In Day’s October 31, 2011 balance sheet, the principal amount of the lease obligation was

a. $63,374

b. $61,446

c. $58,112

d. $56,502

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