Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease includes a guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessor's implicit lease rate, known to the lessee, is 10%.
Present value interest factors are:
$$\begin{array} { l c c }
& \underline { \mathbf { 1 0 \% } } & \underline { \mathbf { 1 2 \% } } \
\text { PVIF \$1 } 10 \text { periods } & 0.38554 & 0.32197 \
\text { PVIF Annuity } 10 \text { periods } & 6.14457 & 5.65022
\end{array}$$
-How much straight-line depreciation expense will Pepper record for Year 1? (Round all calculations to the nearest whole dollar amount.)

Question

Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease includes a guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessor's implicit lease rate, known to the lessee, is 10%.
Present value interest factors are:
$$\begin{array} { l c c } 
& \underline { \mathbf { 1 0 \% } } & \underline { \mathbf { 1 2 \% } } \
\text { PVIF \$1 } 10 \text { periods } & 0.38554 & 0.32197 \
\text { PVIF Annuity } 10 \text { periods } & 6.14457 & 5.65022
\end{array}$$
-How much straight-line depreciation expense will Pepper record for Year 1? (Round all calculations to the nearest whole dollar amount.)

Quizplus · Accepted Answer

Pepper will record $14,747 of straight-line depreciation expense for Year 1. Depreciation expense = (Fair value - Residual value) / Useful life= ($175,000 - $10,000) / 10= $165,000 / 10= $16,500However, Pepper will only record $14,747 of depreciation expense in Year 1 because the lease payments are made at the end of the year. Therefore, Pepper will only have use of the equipment for 11 months in Year 1.Depreciation expense for Year 1 = $16,500 x 11/12= $14,747

Pepper, Inc -How Much Straight-Line Depreciation Expense Will Pepper Record for Year