CHAPTER $20-$ Castle Home Builders Co$.($CHB$)$ entered into a $12-$year lease agreement on

January $2,2023$ for a building where its business is located. The company is required to make

annual payments of $$100,000$ starting on January $2,2023.$ The economic life of the building is $20$

years. CHB has the option to purchase the building at the end of the lease term for $$200,000,$

considerably less than the expected fair value at that time. A real estate appraiser determined that

the fair value of the building was $$894,000$ on the date the lease was signed. The implicit interest

rate in the lease is $8\%$ and $CHB$ has an incremental borrowing rate of $10\%.$ The accounting entry

made was:

$BGN$

$894,000PV$

$12N$

$200,000\frac{+}{-}FV$

$100,000\frac{+}{-}PMT$

COMP$\frac{\text{I}}{Y}8$

To know the asset's present value $($it$\text{'}$s current fair value$)$ means that the implicit interest rate must

be known by the lessee.

UPDATED

BGN

$100,000$ PMT

$200,000FV$

$12N$

$8\frac{\text{I}}{Y}$

COMP PV $

USE THE INFORMATION IN POINT $6$ TO RECOGNIZE THE CAPITAL LEASE AND DO THE

APPROPRIATE ACCOUNTING AS WAS DONE IN CHAPTER $20.$ Reminder: depreciation expense

is not permitted for tax purposes as only CCA is allowed. CHAPTER $18$