Toyohama Group leases rubber processing machinery from General Kinetic for $3.25 million dollars a year for the next 6 years. The machinery is expected to only last 7 years. Toyohama has an incremental borrow rate of 9% while General Kinetic uses a rate of 7.3% to determine the lease payments. The company employs straight line depreciation. (10 pts total, 2 pts per section)
a) How should the lease be classified by the given information and why?
b) What is the annual rent expense?
c) What is the value of the asset and liability of the rubber processing machinery at time 0?
d) What is the annual depreciation expense?
e) Build out the table to show the breakdown of the interest expense, principal payment, leasehold value and book value of the rubbery processing machinery.