Present value of the annuity for rates


Case Scenario:

Bush Corporation signed a lease for equipment from EZ Leasing Company on January 1 20X2, for a period of ten years at $40,000 per year, including insurance of $3,000 and taxes of $2,000 per year. The equipment had a useful life of fifteen years. At the end of the lease, Bush will have the option of buying the equipment outright for a dollar. Bush's incremental borrowing rate is 8%, and the rate implicit in the lease (which is known to Bush) is 6%. Lease payments are due every year on December 31. The present value of an annuity for various terms and rates are as follows:

                   6%      8%
10 years    7.360    6.710
15 years    9.712    8.559

On its financial statements for the year ended June 30, 20X2, Bush will display the following:

  • Accumulated Equipment:
  • Lease Depreciation:
  • Accrued Payable:
  • Interest:

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Finance Basics: Present value of the annuity for rates
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