Question

Barry Limited and Allen Limited enter into a finance lease agreement with the following terms: - lease term is 4 years - estimated economic life of the leased asset is 5 years - 4 × annual rental payments of $15 000 each payable in advance - residual value at the end of the lease term is not guaranteed by the lessee - interest rate implicit in the lease is 8%. On inception date, the present value of the lease payments is:

a) $53656

b) 38656

c) $49682

d) $60000

Answer 1

On inception date, the present value of the lease payments is:

Answer a) $53656.

Explanation : ( $15000 * 1 ) + ( $15000 * .926 ) + ( $15000 * .857 ) + ( $15000 * .794 ) = $ 53656.

Note : present value factor is taken at implicit rate = 8%

And annual rental payments are paid in advance, i.e. year 0, year 1, year 2, and year 3.