East Company leased a new machine from North Company on May 1, year 1, under a lease with the following information:
Lease term 10 years
Annual rental payable at beginning of each lease year $40,000
Useful life of machine 12 years
Implicit interest rate 14%
Present value of an annuity of one in advance for ten
periods at 14% 5.95
Present value of one for ten periods at 14% 0.27
East has the option to purchase the machine on May 1, year 11 by paying $50,000, which approximates the expected fair value of the machine on the option exercise date. On May 1, year 1, East should record a capitalized lease asset of