Alen Company, a lessor, signs a lease agreement for equipment for 3 years. The fair value of the equipment and the equipment cost to the lessor at the inception of the lease are $100,00 each. The estimated economic life of the equipment is 3 years. The estimated residual value of the equipment at the end of the lease is $20,000. The annual rental payment for the first year is $30,000, for the second year is $36,000, and for the third year is $42,000. What will be the annual depreciation expense recorded by the lessor at the end of the second year?

Question

Quizplus · Accepted Answer

The correct answer is A.The annual depreciation expense is calculated as (Fair value - Residual value) / Lease term. In this case, the fair value is $100,000, the residual value is $20,000, and the lease term is 3 years. Therefore, the annual depreciation expense is ($100,000 - $20,000) / 3 = $26,667.

Alen Company, a Lessor, Signs a Lease Agreement for Equipment