Question

In: Accounting

Lease type: Finance lease. Annual lease payments: $100,000 are payable at the beginning of each year....

Lease type: Finance lease. Annual lease payments: $100,000 are payable at the beginning of each year. Lease term: 8 years. Lessor’s and lessee’s interest rate: 12%. Guaranteed residual value by the lessee: $60,000. Estimated residual value at the end of the lease term: $40,000.

Determine the lessee’s Right-of-Use Asset.

a.

580,609

b.

None of the answers.

c.

0

d.

560,415

e.

564,454

Solutions

Expert Solution

Right of Use Asset = Present value of lease payment + Present value of Guranteed residual value.
Present value of lease payment
Present Value Of An Annuity Due
=C + C*[1-(1+i)^-(n-1)]/i]
Where,
C= Cash Flow per period
i = interest rate per period
n=number of period
= $100000+100000[ 1-(1+0.12)^-(8-1) /0.12]
= $100000+100000[ 1-(1.12)^-7 /0.12]
= $100000+100000[ (0.5477) ] /0.12
= $556375.65
Prsent value of guaranteed residual value
PV= FV/(1+r)^n
Where,
FV= Future Value
PV = Present Value
r = Interest rate
n= periods in number
= $60000/( 1+0.12)^8
=60000/2.47596
= $24232.99
Total = $556375.65+24232.99
=$580609

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