[CPApracticer]

The answer is B. 461,456, but there is not explanation. I was wondering if anyone knows what the approach is. Thank you!!

18. A company leases a machine from Leasing, Inc. on January 1, year 1.

The lease terms include a $100,000 annual payment beginning January 1,

year 1. The machine’s fair value is $500,000 and the residual value is

estimated at $20,000. The company guarantees the residual value.

The useful life of the machine is six years, and the lease term is five years.

The implicit rate of interest is 6% and is known by the company. The

following present value factors are provided:

Five years Six years

Present value of $1 at 6% 0.7473 0.7050

Present value of an annuity due at

6% 4.4651 5.2124

Present value of an ordinary annuity

at 6% 4.2124 4.9173

What is the value of the machine in the company’s balance sheet at lease

inception?

$446,510

$461,456

$520,000

$535,340

F: 54 (4/13) 60 (4/14) 67 (9/14) 66 (10/14) 63 (11/15) 79 (2/16) PASSED
A: 60 (5/13) 80 (4/16) PASSED
R: 60 (7/13) 61 (2/15) 70 (4/15) 77 (7/15) PASSED
B: (6/16)