Question: 1. On January 1, 2015, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement.
The agreement requires equal rental payments at the beginning each year, starting January 1, 2015.
The fair value of the building on January 1, 2015 is $4,000,000; however, the book value to Holt is $3,300,000.
The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings on the straight-line method.
At the termination of the lease, the title to the building will be transferred to the lessee.
Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey.
2. What is the amount of the minimum annual lease payment? (Rounded to the nearest dollar.)
a. $181,801
b. $581,801
c. $591,801
d. $601,801