Santa Corporation
NOTE : These multiple choice questions require present value information.
Santa Corporation manufactures Christmas decorations and supplies throughout the world. The company owns property, plants, and equipment and also enters into operating leases for certain facilities. Assume that Santa's incremental borrowing rate is 8%. The company's tax rate is 40%. Listed below are selected financial data for Santa and a portion of the company's operating lease footnote.

Question

Quizplus · Accepted Answer

The present value calculation for the lease payments results in a present value of $500,000 using an 8% discount rate and a 40% tax rate. This lease qualifies as a finance lease as the present value of the lease payments exceeds 90% of the fair value of the asset. Therefore, the lease term should be used to determine the lease's amortization period. The lease term is 10 years, which means that the answer is 10 + (500,000/1,000,000) = 13.66 years.

Santa Corporation NOTE : These Multiple Choice Questions Require Present Value Information