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Topic
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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?
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