For a lease that transfers ownership of the property to the lessee by the end of the lease term, the lessee should
a. Record the minimum lease payment as an expense
b. Amortize the capitalizable cost of the property using the interest method
c. Depreciate the capitalizable cost of the property in a manner consistent with the lessee’s normal depreciation policy for owned assets, except that the period of depreciation should be the lease term
d. Depreciate the capitalizable cost of the property in a manner consistent with the lessee’s normal depreciation policy for owned assets Items 4 and 5 are based on the following information:
Fox Company, a dealer in machinery and equipment, leased equipment to Tiger, Inc. on July 1, 2007. The lease is appropriately accounted for as a sale by Fox and as a purchase by Tiger. The lease is for a 10 year period (the useful life of the asset) expiring June 30, 2017. The first of 10 equal annual payments of $500,000 was made on July 1, 2007. Fox had purchased the equipment for $2,675,000 on January 1, 2007 and established a list selling price of $3,375,000 on the equipment. Assume that the present value at July 1, 2007 of the rent payments over the lease term, discounted at 12% (the appropriate interest rate), was $3,165,000.