Swanson Corporation is leasing a machine from Gray, Inc. Swanson's incremental borrowing rate is 13%. The prime rate of interest is currently 7%. Gray's implicit rate in the lease is 9%; Swanson knows this rate. At what interest rate should the minimum lease payments be computed?
A) 7%
B) 9%
C) 11%
D) 13%

Question

Quizplus · Accepted Answer

The minimum lease payments should be computed using the lessor's implicit rate in the lease if it is known to the lessee and is less than the lessee's incremental borrowing rate. In this case, Swanson knows Gray's implicit rate of 9%, which is less than Swanson's incremental borrowing rate of 13%.

Swanson Corporation Is Leasing a Machine from Gray, Inc