On January 1, year 1, 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, year 1 balance sheet, the principal amount
of the lease obligation was

$63,374
$61,446
$58,112
$56,502

Answer rating: 100% (QA)

The detailed answer for the above question is provided below b This is a capital lease since the ... View the full answer