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23 February, 15:22

On January 1 of the current year, Tell Co. leased equipment from Swill Co. under a 9-year sales-type (finance) lease. The equipment had a cost of $400,000 and an estimated useful life of 15 years. Semiannual lease payments of $44,000 are due every January 1 and July 1. The present value of lease payments at 12% was $505,000, which equals the sales price of the equipment. Using the straight-line method, what amount should Tell recognize as depreciation expense on the equipment in the current year?

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  1. 23 February, 16:02
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    The yearly depreciation on the asset is $56,111.11

    Explanation:

    In calculating the right-of-use asset on a lease, the present of value of future cash payments, that is lease liability amount is added to any lease payments paid on or before commencement of lease agreement, direct initial costs, as well as with any likely amount to be incurred in restoring asset's site or dismantling the asset after usage.

    In this case, only present value of future cash flows is available, hence that is the amount of right-of-use to depreciated over nine year period.

    Depreciation=$505000/9years

    =$56111.11
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