Question

In: Accounting

On January 1, 2015, Harrison Company, a lessee, signed a five-year lease, which qualifies as a...

On January 1, 2015, Harrison Company, a lessee, signed a five-year lease, which qualifies as a capital lease, requiring annual lease payments of $15,000 for equipment. The payments are made at year-end, and the first payments will be made at December 31, 2015. In addition, Harrison guarantees the residual value to be $5,000 at the end of the lease term. Harrison correctly uses the lessor’s implicit interest rate, which is 12%. The present value factors for five periods at 12% are as follows:

Present value of 1 0.567427

Present value of ordinary annuity of 1 3.604776

What would be the debit to Leased Equipment Under Capital Leases on January 1, 2015? (Round amounts to the nearest dollar.)

A. $80,000

B. $56,909

C. $54,072

D. $51,235

Solutions

Expert Solution

In the Commencement of the Lease which is classified as Capital Lease also Known as Finance Lease, the Leased asset should be recognised as NON CURRENT ASSETS in the books of LESSEE at the LOWER of:

a.) The Fair Value of the Assets

b.) At Present Value of Lease Rentals

Where the fair value of the asset is the amount the entity would pay in cash to purchase the asset outright, and t

The present value of lease rentals is the discounted value of minimum payments the lessee has agreed to pay, under the lease agreement over the period of the lease.

The discount rate to use is the interest rate implicit in the lease if it can be calculated, otherwise, it’s the lessee’s incremental borrowing rate for the asset.

IN OUR GIVEN CASE:

Lease Rentals: $ 15,000 Per Year- At the end of Each Year

Term of Lease: 5 Years

Implicit rate of Interest: 12%

SO,

Present Value of Lease Rentals = Lease Rent per year X Present Value Annuity Factor-PVAF (12%, 5 Years)

= $15,000* 3.604776

= $54,071.64 rounded off to $ 54,072.

SO, $ 54,702 should be debit to the Leased Equipment as on January 1, 2015.

Therefore Option "C" is Correct.

ekkarill92 answered 2 years ago
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