Use the following information for questions 10-11.
On January 1, 2020, Jeckyll Ltd. signs a 8-year non-cancellable lease agreement to lease a storage building from Hyde Inc. Hyde is in the business of leasing/selling property. Collectibility of the lease payments is reasonably assured and no additional costs are to be incurred by the lessor (other than executory costs). Both the lessor and the lessee are private corporations adhering to ASPE. The following information is available regarding this lease agreement:
1. The agreement requires equal payments at the end of each year.
2. At January 1, 2020, the fair value of the building is $ 1,350,000 and Hyde's book value is $ 1,125,000.
3. The building has an estimated economic life of 8 years, with no residual value. Jeckyll uses straight-line depreciation for all its depreciable assets.
4. At the termination of the lease, title to the building will transfer to the lessee.
5. Jeckyll's incremental borrowing rate is 10%. Hyde Inc. set the annual rental to ensure a 9% rate of return. The lessor's implicit rate is known to Jeckyll.
6. The yearly lease payment includes $ 4,500 executory costs related to taxes on the property.
-Rounded to the nearest dollar, the amount of the minimum annual lease payment is

Question

Quizplus · Accepted Answer

The minimum annual lease payment can be calculated as the present value of an annuity due of 1 at 9% for 8 years, plus the present value of the $4,500 executory costs, as follows:
PV annuity due of 1 at 9% for 8 years = 4.801045
PV of $4,500 executory costs = 27,401.3953
Minimum annual lease payment = 1 * (1 - 1/1.09^8) / 0.09 * 1.09 + 4,500 / 1.09^1 * 4.801045 + 4,500 / 1.09^2 * 4.801045 + ... + 4,500 / 1.09^8 * 4.801045 + 27,401.3953 = $ 243,902 (rounded to the nearest dollar). Therefore, the correct answer is C.

Use the Following Information for Questions 10-11