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ORIE 350 Homework #6 Due March 5, 2008 1. Camelrock Corporation reported the following relating to a lease transaction on its December 31, 2004 balance sheet (the company entered into the lease transaction on January 1, 2004): Leased Asset – Gross \$143,900 Less: Accumulated Depreciation (23,983) Leased Asset – Net \$119,917 Lease Liability \$126,168 Assuming that (1) the firm depreciates the leased asset on a straight-line basis over the term of the lease, (2) the interest rate for the lease transaction is 12 percent, (3) balance sheet numbers are rounded to the nearest dollar, and (4) lease payments occur at December 31 of each year, compute: a. the term of the lease Initial Value 143900 Term 6 yrs Annual Depreciation 23983 = = = b. the interest expense for the year 2004 ( 29 ( 29 Interest Expense 0.12 143,900 \$17,268 = = c. the amount of each lease payment \$17,268 + (143,900 – 126,168) = \$35,000 d. the total of depreciation expense and interest expense for the year 2005. \$23,983 + (0.12)(126,168) = \$39,123 e. the balance of the lease liability on December 31, 2005 \$126,168 – [35,000 – (0.12)(126,168)] = \$106,308.

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2. Velde Inc. leases a computer system from Cogitoergosum Enterprises. The value of the system is known to be approximately \$50,000. The useful life of the system is four years. Velde will return the computer system to Cogitoergosum at the end of the lease term, at which time the system will have a residual value of \$5,000. Velde will make quarterly payments at the end of each quarter of \$3,980.54 (ordinary annuity). The lease term is 4 years (16 quarters). The nominal annual interest rate is 12%. Velde has the policy of recording all of its depreciation expenses on a quarterly basis. a) Velde signs the lease agreement and takes delivery of the system on January 1, 2007.
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