Question :
On January 1, 2010 the Caswell Company signs a 10-year cancelable (at the alternative or either party) agreement to lease a storage building from the Wake Company. The subsequent information pertains to this lease agreement.
1. The agreement needs rental payments of $100,000 at the end of each year.
2. The cost and fair value of the building on 1st January, 2010 is $2 million.
3. The building has an estimated economic life of 50 years, with no outstanding value. The Caswell Company depreciates same buildings according to the straight-line method.
4. The lease does not hold a renewable option clause. At the termination of the lease, the building reverts to the lessor.
5. Caswell's incremental borrowing rate is 14 percent per year. The Wake Company set the annual rental to make sure a 16% rate of return. (the loss in service value anticipated for the term of the lease)
6. Executory costs of $7,000 yearly, related to taxes on the property, are paid by Wake Company.