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

Question

Quizplus · Accepted Answer

The annual depreciation for a finance lease is calculated by dividing the cost of the asset by the lease term. Given the cost of the asset is $14,000 and the lease payments are made annually at $2,818, which matches a 12 percent return rate, we need to find the lease term to calculate depreciation. Since the present value of the lease payments equals the cost ($14,000), and there's no residual value, the total cost of the asset ($14,000) should be divided by the lease term to find annual depreciation. The lease term can be inferred from the information given but is not directly provided; however, the depreciation method mentioned is Straight-Line (SL), which means the cost of the asset is evenly divided over its useful life. Without the exact lease term, we assume the total cost divided by the annual payment gives a rough estimate of the term, but for depreciation, we divide the cost by the useful life. Since the question does not provide the lease term directly, we use the cost of the asset ($14,000) and the nature of straight-line depreciation to conclude that the asset's cost will be evenly spread over its useful life. Given the information provided, the correct approach is to divide the asset's cost by its useful life, which is not directly given, making the calculation based on the provided choices. The correct answer, based on the information given, would involve understanding that the asset's cost is fully depreciated over the lease term with no residual value, leading to the straight-line depreciation method being applied to the asset's cost.

LMO Leased an Asset for Use in Its Factory