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ACCT 311 Homework Assignment 7

ACCT 311 Homework Assignment 7

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ACCT 311 Homework Assignment 7

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ACCT 311 Homework Assignment 7

On December 31, Year One, Ace signs a lease to use a truck for four years. The truck has a current value of $58,600. Four annual payments of $10,000 are to be paid with the first made on December 31, Year One. After that time, the truck (with an expected life of eight years) will be returned to the lessor. Ace has an incremental borrowing rate of 6 percent. The lessor has an implicit annual interest rate of 8 percent built into the contract. Ace is aware of this implicit rate. The present value of a four-year annuity due of $10,000 at a 6 percent annual rate is $36,700. The present value of a four-year annuity due of $10,000 at an 8 percent annual rate is $35,770. What liability should Ace report on its December 31, Year One, balance sheet?

$0

$10,000

$25,770

$26,700

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