On January 3, 2016, the Walters Corporation signed a 10-year non-cancelable lease for manufacturing equipment. The fair value of the equipment at that time was $550,000. At the end of the lease period, the equipment, which has an estimated life of 15 years, will be returned to the lessor. Additional information is below:
Lease payments (year-end)$80,000
Walters Corporation's incremental borrowing rate10%
Lessor's implicit interest rate (known to Walters)12%
Present value factor for an ordinary annuity of 10 years at 10%6.144567
Present value factor for an ordinary annuity of 10 years at 12%5.650223
?
Walters should
A. capitalize the equipment at $550,000.
B. capitalize the equipment at $491,565.
C. capitalize the equipment at $452,018.
D. not capitalize the equipment.
Answer: D
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