LMO Leased an Asset for Use in Its Factory

question 122

Multiple Choice

LMO leased an asset for use in its factory.The lease specified that LMO was to make annual payments of $2,818 payable at the end of each year.The lessor classified the lease as a direct financing lease because LMO was allowed to lease the asset at cost of $14,000 (i.e., the present value of the lease payments) .The lessor received 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 finance lease by LMO, how much annual depreciation (using SL) should LMO record?

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

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Definitions:

Net Sales

The total revenue from goods or services sold by a company, after deducting returns, allowances for damaged or missing goods, and discounts.

Cost of Goods Sold

The direct costs attributable to the production of the products sold by a company, including material and labor costs.

Net Income

The total earnings of a company after subtracting all expenses, including taxes and operational costs.

Operating Cycle

The duration of time it takes for a business to turn its inventory into cash through sales.