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On January 1, 2011, Yancey, Inc.signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company.The following information pertains to this lease agreement.
(a) The agreement requires equal rental payments at the end of each year.
(b) The fair value of the building on January 1, 2011 is $3,000,000; however, the book value to Holt is $2,500,000.
(c) The building has an estimated economic life of 10 years, with no residual value.Yancey depreciates similar buildings on the straight-line method.
(d) At the termination of the lease, the title to the building will be transferred to the lessee.
(e) Yancey's incremental borrowing rate is 11% per year.Holt Warehouse Co.set the annual rental to insure a 10% rate of return.The implicit rate of the lessor is known by Yancey, Inc.
(f) The yearly rental payment includes $10,000 of executory costs related to taxes on the property.
-Yancey, Inc.would record depreciation expense on this storage building in 2011 of (Rounded to the nearest dollar.)

Question

Quizplus · Accepted Answer

Yancey will use the straight-line method to depreciate the building, which means the annual depreciation expense will be calculated by dividing the difference between the fair value and the estimated residual value by the estimated economic life. In this case, there is no residual value, so the annual expense will be $300,000 (($3,000,000 - $0) ÷ 10).

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