Porter Corporation
NOTE: The following multiple choice questions require present value information.
On January 1, 2012, Porter Corporation signed a five-year non-cancelable lease for certain machinery. The terms of the lease called for:
1) Price to make annual payments of $60,000 at the end of each year (starting on Dec. 31, 2012) for five years. Porter must return the equipment to the lessor end of this period.
2) The machinery has an estimated useful life of 6 years and no expected salvage value.
3) Porter uses the straight-line method of depreciation for all of its fixed assets.
4) Porter's incremental borrowing rate is 8%.
5) The fair value of the asset at January 1, 2012 is $275,000.
What accounting method should Porter use to account for the equipment lease?

Question

Quizplus · Accepted Answer

The lease meets the criteria for a capital lease according to ASC 840-10-25-1. The lease term is for the majority of the estimated useful life of the asset (5/6 years). The present value of the lease payments at the beginning of the lease is substantially all of the fair value of the asset ($255,755.86 out of $275,000). Therefore, the lease should be accounted for as a capital lease by Porter Corporation.

Porter Corporation NOTE: the Following Multiple Choice Questions Require Present Value Information