Question

ACC Int II

Aldridge Corporation leased a machine on December 31, 2018, for a three-year period. The lease agreement calls for annual payments in the amount of $30,006 on December 31 of each year beginning on December 31, 2018. Aldridge has the option to purchase the machine on December 31, 2021, for $5,944 when its fair value is expected to be $9,600. The appropriate interest rate for this lease is 10%. n/i PV of $1 PV, ordinary annuity PV, annuity due 1 period, 10% .90909 .90909 1.00000 2 periods, 10% .82645 1.73554 1.90909 3 periods, 10% .75131 2.48685 2.73554 . What is the amount to be recorded as a right-of-use asset and the associated lease payable.?

Answer 1

The amount to be recorded as a right-of-use asset and the associated lease payable is calculated as follows:-

As the first lease payment is at the beginning of lease (i.e. on December 31, 2018), Therefore the PV of annuity due will be used

PV of annuity due of $1, n = 3, i = 10% = 2.73554

For calculating Present Value of Salvage value at the end of lease period, we will use PV of $1, n=3, i=10% =.75131

Present Value of Lease Payments = Annual Lease Payments*PVAF(3 yrs, 10%)

= $30,006*2.73554 = $82,082.61 or $82,083 (rounded off)

Present Value of salvage value at the end = $5,944*0.75131 = $4,465.79 or $4,466 (rounded off)

Amount to be recognized as right of use asset and lease payable

= PV of Annual lease payments+PV of salvage value at the end

= $82,083+$4,466 = $86,549

Working Notes:-

1) Salvage value will be equal to price for which the option to purchase the machine is given to Aldridge (i.e. $5,944)