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On March 1, 20X4, Kangaroo Inc. (KI) entered into a lease agreement for equipment. Details of the agreement follow:
On March 1, 20X4, Kangaroo Inc. (KI) entered into a lease agreement for equipment.
Details of the agreement follow:
Lease payment, including executory costs $85,000
Executory costs included in lease payment $3,000
Implicit rate in the lease (not known) 4%
Incremental borrowing rate 5%
Lease term 6 years
Economic life of equipment 7 years
Guaranteed residual value $20,000
Expected payout on residual value guarantee $6,000
Option to purchase No
Annual payments due Commencement date
KI elects not to separately report the lease and non-lease components in the agreement.
The agreement includes a provision that KI will pay an additional $10,000 at the end of the
first year of the lease term if its production volume increases by 10% or more during the
first year of use of the leased machinery.
KI's year end is February 28. What is the amount (+/- $10) that it will record for
depreciation of this right-of-use asset for its year ended February 28, 20X5?
a) $72,910
b) $73,580
c) $74,660
d) $76,250
