Lessee, Inc

question 29

Essay

Lessee, Inc., acquired the use of a machine by agreeing to pay the manufacturer of the machine $20,000 per year for 5 years.At the time the lease was signed, the interest rate for a 5-year loan was 8%.
Required:
(a.)Use the appropriate factor from Table 6-5 to calculate the amount that Lessee, Inc.could have paid at the beginning of the lease to buy the machine outright.
(b.)What causes the difference between the amount you calculated in part (a.)and the total of $100,000 ($20,000 per year for 5 years)that Lessee, Inc.will pay under the terms of the lease?
(c.)What is the appropriate amount of cost to be reported in Lessee, Inc's balance sheet (at the time the lease was signed)with respect to this asset?

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Definitions:

Determinism

The philosophical theory that all events, including moral choices, are completely determined by previously existing causes.

Structuralism

An approach in psychology that suggests understanding human culture and psychology can be achieved by analyzing underlying structures in cultural and cognitive systems.

Functionalism

A psychological approach that considers mental life and behavior in terms of active adaptation to environmental challenges.

Nature vs. Nurture

A debate concerning the relative importance of an individual's innate qualities versus personal experiences in determining or causing differences in physical and behavioral traits.