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13 September, 23:02

Wildhorse Company leases a machine from Vollmer Corp. under an agreement which meets the criteria to be a capital lease for Wildhorse. The 6-year lease requires payment of $167000 at the beginning of each year, including $24700 per year for maintenance, insurance, and taxes. The incremental borrowing rate for the lessee is 11%; the lessor's implicit rate is 9% and is known by the lessee. The present value of an annuity due of 1 for six years at 11% is 4.69590. The present value of an annuity due of 1 for six years at 9% is 4.88965. Wildhorse should record the leased asset at

$816572.

$695797.

$668227.

$784215.

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  1. 13 September, 23:14
    0
    The answer is $816,572

    Explanation:

    Solution

    Recall that:

    A 6 year lease payment requires = $167000 at the beginning of the year

    per year for a maintenance, insurance and taxes = $24700

    The increment borrowing rate of lease = 11%

    lessor's implicit rate = 9%

    The present value of annuity due of 1 for 6 years is at 11% = 4.69590

    The The present value of annuity due of 1 for 6 years is at 9% = 4.88965

    Now,

    The Lease asset = Annual payment * present value of annuity due of 1 for six years at 9%

    = 167000 X 4.88965 = 816,572

    Therefore, Wildhorse should record the leased asset at $816,572
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