QUESTION 23
Pisa, Inc. leased equipment from Tower Company under a four-year
lease requiring equal annual payments of $344,152, with the first
payment due at the end of the first year. 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. Pisa,
Inc.’s incremental borrowing rate is 10% and the rate implicit in
the lease (which is not known by Pisa, Inc.) is 8%. Pisa, Inc. uses
the straight-line method to amortize similar assets. What is the
amount of amortization expense recorded by Pisa, Inc. in the first
year of the asset’s life?
PV Annuity Due PV Ordinary Annuity
8%, 4 periods 3.57710 3.31213
10%, 4 periods 3.48685 3.16986
$0 because the asset is amortized by Tower Company.
$284,968
$307,767
$300,000
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