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In: Accounting

On January 1, Espinoza Moving and Storage leased a truck for a four-year period, at which...

On January 1, Espinoza Moving and Storage leased a truck for a four-year period, at which time possession of the truck will revert back to the lessor. Annual lease payments are $10,000 due on December 31 of each year, calculated by the lessor using a 5% discount rate. If Espinoza’s revenues exceed a specified amount during the lease term, Espinoza will pay an additional $4,000 lease payment at the end of the lease. Espinoza estimates a 60% probability of meeting the target revenue amount. What amount should be added to the right-of-use asset and lease liability under the contingent rent agreement?

Solutions

Expert Solution

Answer;-

given that

annual lease payment =$10,000

discounting rate = 5%

calculation of present value of lease payments;-

Year

Amount

(a)

Discounting factor

(b)

Present value

C= (a*b)
1 10,000 952 9520
2 10,000 907 9070
3 10,000 864 8640
4 10,000 823 8230
Total 35,460

Present value of leave rental is =35,460

The given Esphonia well pay an additional $4000 leave payment at the end of the leave if it's revenue exceeds.

A specified amount during the leave term.

Hence first of all we need to know whta is contingent Rent.

Contingent Rent is such position of the lease payments that is not fixed in amount.

   But is based on the future amount of  afactor that changes other than with the passage of time.

hence it should not be included in the value of leave liability of Esphinoza.

such contingent rent should be charged to profit and gross when incuerred.

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ekkarill92 answered 1 year ago
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