A bulk gaining industry is one where the product gains weight or volume through the production process (the whole is greater than the sum of the parts). Due to logistical and transportation costs it is advantageous to produce bulk-gaining materials closer to where they are sold. This is why foreign car companies (Toyota, mazda, etc) have US-based production plants to save on these costs.
The initial investment is the total amount spent or the amount of cash outflow.
The initial investment here is -
Proper cash flow amount = Cost of land (present cost of land) + Cost of Plant + Cost of Grading
Proper cash flow amount = $ 4,300,000 + $ 11,500,000 + $ 670,000
Proper cash flow amount = $ 16,470,000
Answer:
1. Why is this an operating lease for Child Company?
The life of the asset is 10 years while the lease is only 3 years long, so it cannot be classified as a financial lease.
2. What are the amounts of the right-of-use asset and lease liability that Child Company should report on its balance sheet at December 31, 20X1?
annual lease payment = $128,000 (ordinary annuity)
PVIFA, 9%, 3 periods = 2.5313
present value = $128,000 x 2.5313 = $324,006.40
3. How much lease expense should Child Company recognize in 20X1?
lease expense = PV of lease x interest rate = $324,006.40 x 9% = $29,160.58
