Question

Question 15 Crane Co. purchases land and constructs a service station and car wash for a total of $517500. At January 2, 2018, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $670000 and immediately leased from the oil company by Crane. Fair value of the land at time of the sale was $53600. The lease is a 10-year, noncancelable lease. Crane uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to Crane at termination of the lease. A partial amortization schedule for this lease is as follows: Payments Interest Amortization Balance Jan. 2, 2018 $670000 Dec. 31, 2018 $99849.48 $67000 $32849.48 637150.52 Dec. 31, 2019 99849.48 63715.05 36134.43 601016.09 Dec. 31, 2020 99849.48 60101.61 39747.87 561268.22 What is the discount rate implicit in the amortization schedule presented above? 10.00% O 8.00% O 6.00% 4.00%

Answer 1

To calculate discount rate implicate in the amortization table.

First we have to identify the interest portion of first installment. In the given case, interest portion of the first installment is $67,000

Then next step is to identify the balance due (balance for which that interest related). In this case, the balance due at the time of first installment is $670,000

Finally calculate discount rate by dividing interest expense by balance due

That will be $67,000/$670,000 x 12 months/12 months

=10%

So, Option 1 is correct answer.