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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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