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On January 1, 2025, Puppies and Paws Inc (Puppies) leased a big puppy play gym...

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Accounting

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On January 1, 2025, Puppies and Paws Inc (Puppies) leased a big puppy play gym from Doggie Doodles Corporation for a 7 year period. Annual payments are $4,500, and include $700 for repairs on the play gym. The first payment is due at the commencement of the lease. The interest rate implicit in the lease is 8% and is known by Puppies as they are very smart. The incremental borrowing rate is 6% (as the Puppies are cute and can negotiate a lower rate with the bank). Puppies has an option to purchase the play gym at the end of the lease for $9,000. The fair value of the play gym is estimated to be $7,000 at the end of the lease term. The guaranteed residual value on the play gym is $10,000 and Pupples expects to payout $8,000 on the residual value guarantee (as the puppies get very excited and like to chew the play gym all day long). Puppies depreciates all assets on a straight-line basis. Assume that Puppies elects to account for the lease and non-lease components separately. What is the amount of depreciation of the right of use asset will Pupples for its year ended December 31,2025

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