Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2015 it leased equipment with a cost of $320,000 to Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments of $146,518 at the end of each year. The equipment has an expected useful life of 5 years. Silver Point's incremental borrowing rate is 10%, and it depreciates similar equipment using the double-declining balance method. The selling price of the equipment is $520,000, and the rate implicit in the lease is 8%, which is known to Silver Point Co. What is the book value of the leased asset at December 31, 2015?
A) $520,000
B) $416,000
C) $312,000
D) $332,800

Question

Quizplus · Accepted Answer

The book value of the leased asset at December 31, 2015, is calculated using the double-declining balance method. The initial value is the lower of the fair value ($520,000) or the present value of lease payments. The present value of lease payments is calculated using the implicit rate of 8%. After calculating the present value, apply the double-declining balance depreciation for one year.