On January1st,2014,ABC Inc

question 88

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%.
What would be the amount of finance revenue that ABC Inc.would recognize throughout the lease?

• A) $15,000
• B) $20,000
• C) $5,000
• D) $23,000

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Definitions:

Macroeconomics

The branch of economics that focuses on the behavior, performance, structure, and decision-making of an economy as a whole, rather than individual markets.

Large Aggregates

Broad categories or totals in economic data that combine several individual elements, such as national income, GDP, or total employment.

Economy as a Whole

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Scarcity Problem

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