On January 1, 2006, Mollat Co. signed a seven-year lease for equipment having a ten-year economic life. The present value of the monthly lease payments equaled 80% of the equipment’s fair value. The lease agreement provides for neither a transfer of title to Mollat nor a bargain purchase option. In its 2006 income statement Mollat should report
- Rent expense equal to the 2006 lease payments.
- Rent expense equal to the 2006 lease payments less interest expense.
- Lease amortization equal to one-tenth of the equipment’s fair value.
- Lease amortization equal to one-seventh of 80% of the equipment’s fair value.