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Question #$3$ Consideration

On January $1,2017,$ Hogwarts Co$.$ entered into a seven year lease for a Hungarian Horntail dragon from Charlie Weasley Inc. for use in Tri$-$Wizard Tournaments. The lease requires:

a$.$ Annual year$-$end payments of $$24,000$ for the dragon, $$6,000$ for caretaker services, and $$5\mathrm{.}000$ to cover Weasley's annual liability insurance on the dragon.

b$.$ Hogwarts to make a payment of $$100,000$ times the Libor rate at the end each year. The Libor rate is $3\%$ at the beginning of the lease and $4\%$ at the end of the first year.

c$.$ Hogwarts's to make a payment of $3\%$ of the year's Tri$-$Wizard Tournament ticket sales, payable at the end of the year. Hogwarts expects total first year sales to be $$350,000$ at the beginning of the lease, but actually has $$300,000$ in sales the first year.

Hogwarts has a $10\%$ incremental borrowing rate and does not know the rate implicit in the lease. Hogwarts estimates the annual stand$-$alone value of similar dragon leases to be $$25,000$ and the annual stand$-$alone value of similar upkeep contracts to be $$6,250.$ The fair value of the Horntail is $$900,000$ and its useful life is $25$ years.

What are the components in the lease contract? $(1$ point$)$

Determine the initial lease liability the lessee $($Hogwarts$)$ will put on its books. $(6$ points$)$

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