Question: On January 1, Year 1, the Trimble Corporation (Trimble) leases a piece of equipment to use for eight years. The equipment has an expected life of ten years and no anticipated salvage value. Trimble has an incremental borrowing rate of 5%. Annual payments for this asset are $9,000 with the first payment to be made immediately. At the end of the eight years, Trimble has the right to buy the asset for $10,000 in cash. This amount is expected to be significantly below the expected fair value of the equipment on that date so it is reasonable to expect Trimble to pay this amount. Trimble records depreciation based on the straight-line method and interest based on the effective rate method. The present value of an annuity due of $1 at 5% for eight years is assumed to be 6.80. The present value of an ordinary annuity of $1 at 5% for eight years is assumed to be 6.50. The present value of a single amount of $1 at 5% in eight years is assumed to be 0.66. What amount of depreciation expense should Trimble record for Year 1?
$6,780.
$6,510.
$6,120.
$7,650.