Superbyte Corporation Sells Photographic Equipment

question 7

Multiple Choice

Superbyte Corporation sells photographic equipment. Superbyte leases equipment to Laguna Madre Company on January 1 of the current year. The cost to manufacture the equipment was $14,000,000. The lease agreement between SuperByte and Laguna Madre had the follow terms: 1. The lease is noncancellable.
2) The lease has no residual value or bargain purchase option.
3) The lease term is 8 years; payments are made semiannually.
4) Depreciation is recorded each December 31 using the straight-line approach.
5) The economic life of the equipment is 8 years.
6) The lessee's incremental borrowing rate and the implicit interest rate are both 12% annually.
7) The lease payments are $1,493,617 semiannually. The first payment is due at the inception of the lease; subsequent payments are made every July 1 and January 1.
8) The fair value of the equipment at the inception of the lease is $16,000,000.
What amount of depreciation will Laguna Madre record in its income statement on December 31 of the current year?

• A) $1,443,500
• B) $1,750,000
• C) $2,000,000
• D) $1,875,000

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Definitions:

Notes Receivable

Notes Receivable are written promises for amounts to be received by a business, indicating that another party has agreed to pay the business a specific sum of money on a certain date.

Accrued Interest

Interest on a loan or bond that has accumulated since the principal investment, or since the last payment, but has not yet been paid.

Cash

Cash refers to money in the form of bills or coins that is readily available for transactions or for meeting immediate obligations.

Allowance for Doubtful Accounts

A contra asset account used to estimate the amount of receivables that may not be collected.