A question regarding lease

  • Creator
    Topic
  • #200343
    wjxhahaha
    Participant

    Quattro Corporation signed a lease from Cinco Leasing Company on July 1, Year 1, for equipment having a five-year useful life. The lease does not include any option to purchase the equipment at the end of the four-year lease term, nor does it include a provision for ownership transfer. Five equal payments of $10,000 per year are required by the terms of the lease, with the first payment due upon signing. Quattro’s incremental borrowing rate is 8 percent, but its implicit interest rate is unknown.

    Present value of an annuity at 8% for 5 years = 3.993

    Present value of an annuity at 8% for 4 years = 3.312

    On its December 31, Year 1, financial statements, Quattro would display the following amounts in the indicated accounts under U.S. GAAP:

    Equipment/ Accumulated Depreciation/ Lease Payable

    a.

    $0/$0/$0

    b.

    $49,930 /$6,241 /$39,930

    c.

    $43,120 /$5,390 /$33,120

    d.

    $43,120 /$4,312 /$33,120

    Correct answer is C.

    They used 10,000*3.312+10,000 down payment for the value of equipment, which is the PV of minimum lease payment. I don’t understand why I need to add that 10k initial payment. For an annuity due, doesn’t the initial payment decrease our PV of minimum lease payment?

Viewing 6 replies - 1 through 6 (of 6 total)
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    Replies
  • #759454
    Yolonge
    Participant

    FAR stuff is escaping from my head already but let me see if I can help.

    Simply because you want to put what your equipment is worth on your book.

    It will be a capital lease since it is over 75%(?) of equipment's useful life. they are leasing from other party, they shall capitalize the lease as asset on their book.

    Capitalized amount will be the value of the equipment, which in this case is 43120. Your future lease payable was decreased by full first payment because you have paid on the same date so interest was not accruing.

    To verify $43,120:

    July 1 Year 1
    43120 – 10000 = 33120 lease payable

    July 1 Year 2
    33120 x 1.08 = 35769.6 – 10000 = 25769.6

    July 1 Year 3
    25769.6 * 1.08 = 27831.17 – 10000 = 17831.17

    July 1 Year 4
    17831.17 * 1.08 = 19257.66 – 10000 = 9257.66

    July 1 Year 5 (last year)
    9257.66 * 1.08 = 9999 – 10000 = 0

    Maybe not a very good explanation but I did what I can remember. Hope this helps

    Materials: Wiley book + Ninja MCQ

    FAR - 83 (Jan 2016)
    Study time: 6 weeks
    BEC - 87 (April 2016)
    Study time: 2 weeks
    AUD - 92 (July 2016), (74 Feb 2016), (72 May 2016)
    Study time: 4 (Feb) + 2 (May) + 3 (July) = 9 weeks total
    REG - (70 April 2016)
    Study time: 3 weeks

    #759455
    Yolonge
    Participant

    And depreciation is 43120/8 = 5390 as it will only depreciate for 4 years and starting july 1 it is half a year (6 months).

    Materials: Wiley book + Ninja MCQ

    FAR - 83 (Jan 2016)
    Study time: 6 weeks
    BEC - 87 (April 2016)
    Study time: 2 weeks
    AUD - 92 (July 2016), (74 Feb 2016), (72 May 2016)
    Study time: 4 (Feb) + 2 (May) + 3 (July) = 9 weeks total
    REG - (70 April 2016)
    Study time: 3 weeks

    #759456
    Biff-1955-Tannen
    Participant

    Those factors are for ordinary annuities, not annuity due. I can't wait to be done with these exams. Questions like this are beyond annoying. Rather than give us correct information such as the factor for an annuity due for 5 periods, they give this bs.
    When they omit the word “ordinary” from those factors, in my opinion that's them trying to trick you into getting it wrong. That isn't testing to see if we know to add the 10,000.

    And why TF are there 5 payments on a 4 year lease

    AUD 93 Jan 16
    BEC 83 Feb 16
    FAR 83 Apr 16
    REG 84 May 16

    99% Ninja MCQ only

    #759457
    wjxhahaha
    Participant

    @mhei8116

    Thank you for trying to help. The core problem for me here is that I don't understand why we need to include that 10k as the value for equipment. I thought the euipment will start at 33120.

    #759458
    Yolonge
    Participant

    Think about down payment on your car purchase; if you put 10k down payment on your new car it does not decrease your car's value but only the payable in the future.

    Since ordinary annuity for 4 years is same as annuity due for 5 years, use the annuity due table:

    Annuity due factor 8% interest for 5 years = 4.3121

    4.3121 x payment ($10,000) = 43120 (approx.)

    So you have 2 options here.

    1. Down payment + ordinary annuity factor 8% for 4 years x $10,000

    10000+ 33120 = 43120

    2. Annuity due factor 8% for 5 years x $10,000

    10000 * 4.312 = 43120

    Good luck with your study! Hope this helps in any way

    Materials: Wiley book + Ninja MCQ

    FAR - 83 (Jan 2016)
    Study time: 6 weeks
    BEC - 87 (April 2016)
    Study time: 2 weeks
    AUD - 92 (July 2016), (74 Feb 2016), (72 May 2016)
    Study time: 4 (Feb) + 2 (May) + 3 (July) = 9 weeks total
    REG - (70 April 2016)
    Study time: 3 weeks

    #759459
    wjxhahaha
    Participant

    @mhei8116
    Thank you so much!!! This completely clears out my trouble!! Very very helpful!

Viewing 6 replies - 1 through 6 (of 6 total)
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