On January 1, year 1, Day Corp. entered into a ten-year lease agreement with Ward, Inc. for industrial equipment. Annual lease payments of $10,000 are payable at the end of each year. Day knows that the lessor expects a 10% return on the lease. Day has a 12% incremental borrowing rate. The equipment is expected to have an estimated useful life of ten years. In addition, a third party has guaranteed to pay Ward a residual value of $5,000 at the end of the lease.
The present value of an ordinary annuity of $1 at
12% for ten years is 5.6502
10% for ten years is 6.1446
The present value of $1 at
12% for ten years is .3220
10% for ten years is .3855
In Day’s October 31, year 1 balance sheet, the principal amount of the lease obligation was