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In: Accounting
On January 2, 2020, Michael (lessee) entered into a 10-year non-cancelable lease with Thomas (lessor) for...
On January 2, 2020, Michael (lessee) entered into a 10-year non-cancelable lease with Thomas (lessor) for equipment.
Required Information:
-
The equipment has an estimated useful life of 13 years.
-
There is no purchase option. Transfer of ownership to Michael is not stipulated in the lease contract.
-
The fair value to Thomas (lessor) at the inception of the lease was $4,000,000. Lessor's cost was $3,775,000. Sales commissions were $2,500.
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Michael's incremental borrowing rate is 10%. The implicit annual rate in the lease (known to Michael) is 8%.
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Michael and Thomas use straight-line depreciation.
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The lease requires rental payments of $266,000, payable on 1/2/20 and subsequently on 6/30 and 12/31.
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Michael guarantees that Thomas will realize $200,000 from selling the asset at the end of the lease. The expected residual value is $120,000.
1) Refer to the information given except that Michael did not guarantee any residual value at the end of the lease. Fully explain what would be different for Michael.
2) Refer to the information given but also assume that Michael had
the option to extend the lease by 2 years. Would the lease term
change for Michael? Would you need more information? Hint:
could be lease term: 12 years
Solutions
ekkarill92 answered 1 year agoRelated Solutions
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