On January 1, 2010 the Caswell Company signs a 10-year cancelable (at the option or either party) agreement to lease a storage building from the Wake Company. The following information pertains to t

On January 1, 2010 the Caswell Company signs a 10-year cancelable (at the option or either party) agreement

to lease a storage building from the Wake Company. The following information pertains to this lease agreement.

1. The agreement requires rental payments of $100,000 at the end of each year.

2. The cost and fair value of the building on January 1, 2010 is $2 million.

3. The building has an estimated economic life of 50 years, with no residual value. The Caswell Company depreciates similar buildings according to the straight-line method.

4. The lease does not contain a renewable option clause. At the termination of the lease, the building reverts to the lessor.

5. Caswell’s incremental borrowing rate is 14% per year. The Wake Company set the annual rental to ensure a 16% rate of return. (the loss in service value anticipated for the term of the lease)

6. Executory costs of $7,000 annually, related to taxes on the property, are paid by Wake Company.

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