Lofgreen Company Leased an Asset for Use in Its Factory

question 5

Multiple Choice

Lofgreen Company leased an asset for use in its factory. The lease agreement specifies that Lofgreen is to make annual payments of $2,818 payable at the end of each year. The lessor classified the lease as a direct-financing lease since Lofgreen was allowed to lease the asset at its cost of $14,000 (the present value of the lease payments) . The lessor receives a 12 percent rate of return on the lease. The estimated residual value at the end of the lease term is zero.
If the lease was classified as a capital lease by Lofgreen, how much annual depreciation would Lofgreen record using the straight-line method?

• A) $1,400
• B) $1,750
• C) $1,310
• D) $2,818