Day Corp

On January 1, 2015, Day Corp. entered into a 10-year lease agreement with Ward, Inc. for industrial equipment. Annual lease payments of $10,000 are payable at the end of each year. Day knows that the lessor expects a 10 percent return on the lease. Day has a 12 percent incremental borrowing rate. The equipment is expected to have an estimated useful life of 10 years. In addition, a third party has guaranteed to pay Ward a residual value of $5,000 at the end of the lease.

The present value of an ordinary annuity of $1 at

12% for 10 years is 5.6502

10% for 10 years is 6.1446

The present value of $1 at

12% for 10 years is 0.3220

10% for 10 years is 0.3855

On Day’s October 31, 2015, balance sheet, the principal amount of the lease obligation was

$61,446.

$58,112.

$56,502.

$63,374.

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