Question

Problem 21-06 (Part Level Submission) Wildhorse Leasing Company agrees to lease equipment to Sheffield Corporation on January 1, 2020. The following information relates to the lease agreement. 1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. 2. The cost of the machinery is $514,000, and the fair value of the asset on January 1, 2020, is $677,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $55,000. Sheffield estimates that the expected residual value at the end of the lease term will be 55,000. Sheffield amortizes all of its leased equipment on a straight-line basis. 4. The lease agreement requires equal annual rental payments, beginning on January 1, 2020. 5. The collectibility of the lease payments is probable. 6. Wildhorse desires a 10% rate of return on its investments. Sheffield’s incremental borrowing rate is 11%, and the lessor’s implicit rate is unknown. (Assume the accounting period ends on December 31.) Click here to view factor tables. (a) (b) (c) Your answer is incorrect. Try again. Compute the value of the lease liability to the lessee. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,972.) Present value of minimum lease payments $

Answer 1

Sollution

Lease Liability =$654448

Calculation Present Value of minimum lease payment
A. P.V of annual payment=(annual lease payment* P.V of annuity 11% for 7 years)=
($133262*4.71220)	$627,957
B . P.V of Residual payment
(Guaranteed Residual payment*P.V of $1 @11% for 7 years)=
($55000*.48166)	$26,491
C.Present Value of minimum lease payment
(A+B)	$654,448

Working
Wildhorse Leasing Company
Lease Term	7
Economic Life	9
Fair Value	$677,000.00
Guaranteed Residual Value	$55,000.00
Cost Price	$514,000.00
Rate of Return	10%
Incremental Borrowing rate	11%
P.V of $1 @10% for 7 years	0.51316
P.V of $1 @11% for 7 years	0.48166
P.V of annuity @10% for 7 years	4.86842
P.V of annuity @11% for 7 years	4.71220
Annual Rental=((Fair Value-(Residual value* P.V of $1 10% for 7 years))/P.V of annuity 10% for 7 years
($677000-($55000*.51316))/4.86842
($677000-$28223.80)/4.86842
($648776.20/4.86842	$133,262