Use the Following Information for Questions 75 Through 80

question 46

Multiple Choice

Use the following information for questions 75 through 80. (Annuity tables on page 21-25.)
Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2015 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement:
(a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $287,432 are due on January 1 of each year.
(b) The fair value of the machine on January 1, 2015, is $800,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease.
(c) Alt depreciates all machinery it owns on a straight-line basis.
(d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates.
(e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful.
-Which of the following lease-related revenue and expense items would be recorded by Yates if the lease is accounted for as an operating lease?

• A) Rent Revenue only
• B) Interest Revenue only
• C) Depreciation Expense only
• D) Rent Revenue and Depreciation Expense

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Definitions:

Rational Decision Makers

Individuals or organizations that make choices that maximize their utility, based on systematic analysis of options and outcomes.

Expected Marginal Benefit

The additional benefit perceived by a consumer or producer from consuming or producing one more unit of a good or service.

Expected Marginal Cost

Refers to the anticipated increase in cost for producing one additional unit of a good or service.

Macroeconomics

The study of the economic behavior of entire economies, as measured, for example, by total production and employment.