Problem
A Company recently leased machinery to B Company. The five-year lease contract requires minimum rental payments of $20,000 at the beginning of each year, starting on January 1, Year1. The lease is classified as a capital lease. The 9% implicit rate on the lease is known to B Company. There is a $5,000 guaranteed residual value. The estimated life of the equipment is six years.
1. Compute the present value of the minimum lease payments for the lessee.
2. Compute the present value of the minimum lease payments for the lessor.
3. Compute the depreciation expense the lessee (Stebbins) will record at December 31, Year1.