Problem: Quattro Corporation signed a lease from Cinco Leasing Company of July 1, 20X3, for equipment having a five-year useful life. The lease does not include any option to purchase the equipment at the end of the four-year lease term, nor does it include a provision for ownership transfer. Five equal payments of $10,000 per year are required by the term of the lease, with the first payment due upon signing. Quattro's incremental borrowing rate is 8%, but its implicit interest rate is unknown.
Present value of an annuity at 8% for 5 years = 3.993
Present value of an annuity at 8% for 4 years = 3.312
On its December 31, 20X3 financial statements, Quatto would display the following amounts in the indicated accounts:
- Equipment:
- Accumulated Depreciation:
- Lease payable: