On January1st,2014,ABC Inc

question 28

Multiple Choice

On January1st,2014,ABC Inc.(the lessor) agrees to lease a piece of specialized piece of machinery to DEF Inc.(the lessee) for 5 years.ABC Inc.is a financial intermediary specializing in leasing arrangements such as the one described below.Details are as follows: Fair value of machinery at inception of the lease: $100,000.
Lease term: 5 years (no bargain renewal terms) .
Executory costs of $10,000 are reimbursed by the lessee.
5 Annual lease payments of $23,000 each are made on January 1^st of each year starting on January 1^st,2014.
Bargain purchase option at end of lease: $5,000.It is estimated that the equipment will have a fair value of $10,000 at the end of the lease.
Economic life of the asset is 10 years,after which the equipment will be worthless.Straight-line depreciation applies.
ABC's implicit interest rate with respect to this lease is 10%.This is rate is known by DEF Inc.
DEF Inc's incremental borrowing rate is 9%.
Assuming that this qualifies as a finance lease,what would be the amount of DEF Inc's annual depreciation as per ASPE (rounded) ?

• A) $10,000
• B) $10,076
• C) $9,901
• D) $5,000

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Definitions:

Intramembranous Ossification

A process by which bone tissue is formed directly from fibrous connective tissue, playing a crucial role in the development of flat bones like those of the skull.

Cartilage Models

Represents a phase in endochondral ossification where cartilage is eventually replaced by bone.

Skull

The bony structure forming the head, protecting the brain, and supporting the structures of the face.

Endochondral

Pertaining to the process by which bone tissue is created from cartilage, a critical path in the formation of the skeletal system of vertebrates.