John Roesch Inc. was incorporated in 2013 to operate as a computer software service firm with an accounting fiscal year ending August 31. Roesch's primary product is a sophisticated online inventory-control system; its customers pay a fixed fee plus a usage charge for using the system.
Roesch has leased a large, Alpha-3 computer system from the manufacturer. The lease calls for a monthly rental of $40,000 for the 144 months (12 years) of the lease term. The estimated useful life of the computer is 15 years.
All rentals are payable on the first day of the month beginning with August 1, 2014, the date the computer was installed and the lease agreement was signed.
The lease is noncancelable for its 12-year term. Roesch can purchase the Aplpha-3 system from the manufacturer at the end of the 12-year lease term for 75% of the computer's fair value.
This lease is to be accounted for as a capital lease by Roesch, and it will be depreciated by the straight-line method with no expected salvage value. Borrowed funds for this type of transaction would cost Roesch 12% per year (1% per month). Following is a schedule of the present value of $1 for selected periods
discounted at 1% per period when payments are made at the beginning of each period.
Periods Present Value of $1 per Period
(months) Discounted at 1% per Period
1 1.000
2 1.990
3 2.970
143 76.658
144 76.899