LMO Leased an Asset for Use in Its Factory

question 222

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) $1,310
• D) $2,818

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