Can someone help me understand residual value? My impression is that it's another name for salvage value and some of the online guidance I found suggests the same, but the following question is throwing me for a loop:
On January 1, year 1, Eber Co. leased equipment under a four-year finance lease. The present value of minimum lease payments is $348,680. The equipment had a five-year economic life and a $20,000 guaranteed residual value. The equipment reverted to the lessor at the end of the lease. What amount should Eber report as depreciation expense at December 31, year 1?
A.
$87,170
B.
$82,170
C.
$69,736
D.
$65,736
You answered: B. The correct answer is: A
Explanation:
The correct answer is (A).
The present value of minimum lease payments is $348,680. Depreciation expense on December 31st, year 1 will be $348,680 / 4 = $87,170. There is no title transfer or bargain purchase option in this finance lease. The asset will be depreciated over the shorter of either the lease term or useful life, which in this case is the 4-year lease term compared to the 5-year useful life.
Why would I not deduct the residual value in determining depreciable base, i.e. $328,680?
AUD - 80
BEC - 80
FAR - 82
REG - 82
.
