## Question

# Use the following information for questions 1 and 2. Caterpillar Financial Services Corp. (a subsidiary of Caterpillar) and Sterling Construction sign a lease agreement

Use the following information for questions 1 and 2. Caterpillar Financial Services Corp. (a subsidiary of Caterpillar) and Sterling Construction sign a lease agreement dated January 1, 2020, that calls for Caterpillar to lease a backhoe to Sterling beginning January 1, 2020. The terms and provisions of the lease agreement, and other pertinent data, are as follows. The term of the lease is five years. The lease agreement is non- cancelable, requiring equal rental payments of $ at the beginning of each year. The backhoe has a fair value at the commencement of the lease of $100,000, an estimated economic life of six years, and a guaranteed residual value of $5,000. The lease contains no renewal options. The backhoe reverts to Caterpillar at the termination of the lease. Sterling's incremental borrowing rate is 4 percent per year. Sterling depreciates, on a straight-line basis, similar equipment that it owns. Caterpillar sets the annual rental rate to earn a rate of return of 5 percent per year, Sterling is aware of this rate. Present value factor of annuity due (i=4%, n = 5) Present value factor of annuity due (i=5%, n = 5) Present value factor of annuity due (i=4%, n = 6) Present value factor of annuity due (i = 5%, n = 6) Present value factor of 1 (i=4%, n = 5) Present value factor of 1 (i=5%, n=5) Present value factor of 1 (i=4%, n=6) 4.62990 4.54595 5.45182 5.32948 0.82193 0.78353 0.79031 0.74622 Present value factor of 1 (i=5%, n=6) 1. Assuming this lease is a finance lease, what is the rental payment set up by Caterpillar? (10 points) 2. Assuming this lease is a finance lease, what are the lease expenses of Sterling for the year 2020? (10 points)

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### Step: 1

1 Rental Payment Set Up by Caterpillar 10 points Given that this is a finance lease we need to determine the rental payment such that the present valu...### Get Instant Access to Expert-Tailored Solutions

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### Step: 2

### Step: 3

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