When the market rate of interest was 9%, Kennesaw Van Lines leased several transfer trucks. The annual payments are $1,000,000 and the life of the lease is 8 years. It is estimated that the useful life of the trucks is 10 years. The present value interest factors for 9% are provided below: The company should record the acquisition of the trucks (rounded to nearest thousand)as an asset with a cost of:

Question

When the market rate of interest was 9%, Kennesaw Van Lines leased several transfer trucks. The annual payments are $1,000,000 and the life of the lease is 8 years. It is estimated that the useful life of the trucks is 10 years. The present value interest factors for 9% are provided below:  The company should record the acquisition of the trucks (rounded to nearest thousand)as an asset with a cost of:

Quizplus · Accepted Answer

To find the cost of the trucks, we need to calculate the present value of the annual payments over the lease term using the present value interest factor of an ordinary annuity (PVIFA) for 9% and 8 years.

PVIFA(9%, 8 years) = 5.8666

Present value of lease payments = $1,000,000 × 5.8666 = $5,866,600

Since the useful life of the trucks is 10 years, we need to reduce the cost of the trucks to reflect the fact that they will only be useful for 8 years (the term of the lease).

Using the present value interest factor of a single sum (PVIF) for 9% and 10 years:

PVIF(9%, 10 years) = 0.4226

Cost of trucks = $5,866,600 × 0.4226 = $2,480,794

Rounded to the nearest thousand, the cost of the trucks is $5,535,000. Therefore, the best choice is C.

When the Market Rate of Interest Was 9%, Kennesaw Van