Essay
On January 1, 2010, Holly Company leased telephone equipment from ICON, Inc. Straight-line depreciation is used on all equipment with no salvage value. The contract required Holly to pay $5,000 each December 31 for the next three years, at which time the equipment is to be returned to ICON. Using an effective rate of interest of 8%, the present value of the lease payments is $12,885. Numerically derive the difference in Holly's 2010 income if the lease is treated as an operating lease instead of a capital lease.
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