A lessor entered into a lease on December 31, 20X2 that will be accounted for as a

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Question:

A lessor entered into a lease on December 31, 20X2 that will be accounted for as a direct financing lease. The lease calls for 10 payments, beginning on December 31, 20X3, of $4,000 each. The lessee's incremental borrowing rate is 6% and the present value of an ordinary annuity of $1 at 6% for 10 periods is 7.360. The machine has a 10 year life and cost the lessor $30,000. How much profit or loss will be recognized by the lessor in 20X2 and how much depreciation expense will be recognized by the lessee in 20X3, assuming the machine is depreciated on a straight-line basis?

Your Answer:

a. The lessor will recognize a loss of $560 in 20X2 and the lessee will recognize depreciation expense of $2,944 in 20X3.
b. The lessor will recognize a loss of $560 in 20X2 and the lessee will recognize depreciation expense of $3,000 in 20X3/
c. The lessor will recognize no gain or loss in 20X2 and the lessee will recognize depreciation expense of $2,944 in 20X3.
d. The lessor will recognize no gain or loss in 20X2 and the lessee will recognize depreciation expense of $3,000 in 20X3.