Question
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(Show Work and Calculations) On December 31, 2016, Larkspur Corporation signed a 5-year, non-cancelable lease for...
(Show Work and Calculations)
On December 31, 2016, Larkspur Corporation signed a 5-year,
non-cancelable lease for a machine. The terms of the lease called
for Larkspur to make annual payments of $9,399 at the beginning of
each year, starting December 31, 2016. The machine has an estimated
useful life of 6 years and a $4,700 unguaranteed residual value.
The machine reverts back to the lessor at the end of the lease
term. Larkspur uses the straight-line method of depreciation for
all of its plant assets. Larkspur’s incremental borrowing rate is
6%, and the lessor’s implicit rate is unknown.
1. What type of lease is this
2. Compute the present value of the lease payments.
Solutions
Expert Solution
1) The type of lease is operating Lease. Operating lease is that other than finance lease.
Finance lease is a lease in which substantially all the risk and reward incidental to ownership is transferred.
2) Present Value of Lease Payments
Year Cash Flow PVF@6% Discounted Cash flow
0 $9,399 1 $9,399
1-5 $9,399 4.2124 $39,592
6 $4,700 0.7049 $3,313.03
Present Value of Lease Payments $52,304
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