Multiple Choice Question 70 Blossom, Inc. leased equipment from Tower Company under a 4-year lease r

Multiple Choice Question 70

Blossom, Inc. leased equipment from Tower Company under a 4-year lease requiring equal annual payments of $444152, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4 year useful life and no salvage value. Blossom, Inc.’s incremental borrowing rate is 11% and the rate implicit in the lease (which is known by Blossom, Inc.) is 9%. Assuming that this lease is properly classified as a capital lease, what is the amount of principal reduction recorded when the second lease payment is made in Year 2?

PV Annuity Due

PV Ordinary Annuity 9%, 4 periods

3.53129

3.23972 11%, 4 periods

3.44371

3.10245

$263020 $314648 $444152 $342967

 

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