On January 1, 2021, Cappic Ltd. signed an 8-year, non-cancellable lease agreement to lease a highly specialized landscaping machine from Jedi Corp. The agreement is non-renewable and requires the payment of $50,397 every January 1, starting in 2021. The yearly rental payment includes $2,500 of executory costs related to a maintenance contract on the machine, and at the end of the lease term, the machine reverts to the lessor. The machine has an estimated economic life of 12 years, with an unguaranteed residual value of $22,000. Copic Ltd. uses the straight-line method for depreciation, and the fair value of the machine on January 1, 2021, was $300,000. Copic Ltd. follows its year-end is June 30. Additionally, its incremental borrowing rate is 8% per year. Jedi Corp.’s implicit rate is 9%, which is known to Cappic Ltd.

Required:

1. How much lessor needs to charge for depreciation per year?

2. For Lessor, the deal will be beneficial or not explained by finding the preset value of the future receiving amount?

3. Lessor should go for leasing or not based on your calculation through finding the present value of future payment?

Answer rating: 100% (QA)

Solution 1 1Jan21 to 1 Jan 28 50 397 2500 47897 Lease term 8 years L... View the full answer