Question - On January 1, 2013, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. The following information pertains to this lease agreement.
(a) The agreement requires 10 equal rental payments at the end of each year.
(b) The fair value of the building on January 1, 2013 is $4,000,000; however, the book value to Holt is $3,300,000.The present value of minimum annual lease payment is set to be equal to the fair value of the building.
(c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings on the straight-line method.
(d) At the termination of the lease, the title to the building will be transferred to the lessee.
(e) 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, Inc.
(f) The yearly rental payment includes $10,000 of executory costs related to taxes on the property.
(g) The PV factor for an ordinary annuity for 10 years at 10% is 6.14457. The PV factor for an ordinary annuity for 10 years at 11 % is 5.88923
1) What is the amount of the minimum annual lease payment? (Rounded to the nearest dollar.)
a. $679.206
b. $640,981
c. $650,981
d. $660,981
2) If the lessor's implicit rate was not known to the lesse, what is the amount of minimum annual lease payment?
a. $679,206
b. $640,981
c. $650,981
d. $660,981