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

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Definitions:

Elasticity of Demand

A measure of how much the quantity demanded of a good responds to a change in its price, income levels, or other factors.

Deadweight Loss

The loss of economic efficiency that can occur when the free market equilibrium for a good or a service is not achieved.

Taxes on Labor

Financial charges imposed by governments on workers' income, salaries, and wages.

Elderly

Individuals who are significantly beyond the usual age for retirement, often implying an age at which they receive certain societal or economic benefits like pensions.