Leases

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  • #193845
    Anonymous
    Inactive

    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?

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  • #664782
    smazthespaz
    Member

    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

    #664783
    Anonymous
    Inactive

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

    #664784
    smazthespaz
    Member

    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

    #664785
    Anonymous
    Inactive

    Oh cool. Thanks.

Viewing 4 replies - 1 through 4 (of 4 total)
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