Toys Manufacturer leased an asset for use in its factory in Athens, Georgia from Robotic Corporation. The lease agreement stipulates that Toys Manufactured is required to make annual payments of $2,818 payable on the last day of the calendar year (December 31 each year). Robotic Corporation classified the lease as a direct-financing lease since Toys Manufacturer was permitted to lease the asset at its cost of $28,000 which is the present value of the minimum lease payments. Robotic Corporation receives a 10% rate of return on the lease. The estimated salvage value at the end of the lease term is zero.
Requirement:
Compute the annual depreciation for Toys Manufactured if the lease is classified as a capital lease by the lessee. The lessee depreciates similar assets utilizing straight-line depreciation. Round all calculations to the nearest dollar. You are also required to utilize the time value tables from the textbook. Do not compute the answers with a financial calculator as if your computations are not within +/- $2 of my solution then you will not receive any credit.
The topic is Accounting for Leases.