On January 2, 2011, Boston Corporation entered into a 10-year noncancelable lease requiring year-end payments of $60,000. The incremental borrowing rate for Boston is 10%. The lessor's implicit rate (which is known by Boston) is 12%. The lease contains no transfer of title or bargain purchase option provisions. The leased property has an estimated economic life of 12 years. At what amount should the lease be capitalized by Boston?
A) $0
B) $339,012
C) $368,676
D) $600,000

Question

Quizplus · Accepted Answer

The lease should be capitalized by Boston at the present value of the lease payments using Boston's incremental borrowing rate since it is lower than the lessor's implicit rate. The formula to calculate the present value of an annuity is:

PV = PMT x [(1 - (1 / (1+r)^n)) / r]

Where PV is the present value, PMT is the annual lease payment, r is the discount rate, and n is the number of periods.

Using the formula:

PV = $60,000 x [(1 - (1 / (1+0.10)^10)) / 0.10] = $368,676

Therefore, the lease should be capitalized by Boston at $368,676.

On January 2, 2011, Boston Corporation Entered into a 10-Year