[Anonymous]

A company leases a machine from Leasing, Inc. on January 1, year 1. The lease terms include a $100,000 annnual 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 known by the company. The following present value factors are provided:

PV // Five Years // Six Years

Present value of $1 at 6% // 0.7473 // 0.7505

Present value of an annuaity 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?

A. $446,540

B. $461,456

C. $520,000

D. $535,340

answer B. How do you get this number?

[smazthespaz]

The first payment is at the beginning of the term, so I is an annuity due (5 year term).

PV of the lease payments = 100,000 * 4.4651 = 446,510

+

PV of the guaranteed residual value (use lease term, not useful life) = 20,000 * 0.7473 = 14,946

And the answer is 461,456 (does not exceed the fair value of the asset)

REG - 83 11/24/14
AUD - 94 2/17/15
FAR - 93 5/26/15
BEC - 90 8/10/15

[Anonymous]

Would you have to do something else if it does exceed the fair value of the asset?

[smazthespaz]

You just record whatever value is less. For example, if the fair value was 400,000, you would record the 400,000 as the capital asset on the balance sheet.

REG - 83 11/24/14
AUD - 94 2/17/15
FAR - 93 5/26/15
BEC - 90 8/10/15

[Anonymous]

Oh cool. Thanks.

[Author]

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