Question

Robin least a machine from Reddy leasing. Elyssa requires 10 annual payment of $10,000 beginning immediately. The lease contract specifies the right implicit in the lease of 7% in a purchase option of $12,000 at the end of the 10th year, even though I’m in the machines estimated value on the date is $20,000. Robin is reasonably certain to exercise the purchase option. What a match and Robin record as a lease liability at least commencement?

Robin least a machine from ready leasing. The lease requires 10 annual payment of $10,000 beginning immediately. The lease contract specifies the right implicit in the lease of 7% in a purchase option of $12,000 at the end of the 10th year, even then with the machines estimated value on the date is $20,000. Robin is reasonably certain to exercise the purchase option. What amount should Robin record as a lease liability at least commencement?

A. $75,152

B. $79,219

C. $81,253

D. $85,319

Answer 1

Answer -

Step - ( 1 ) - Information Given -

• Robin acquired a machine on lease.
• Annual lease payments of $10000 beginning immediately, for 10 years
• Discount rate = 7%
• Purchase option of $12000 at the end of the 10^th year.

Step - ( 2 ) - Type of lease -

As it is given that , Robin is reasonably certain to exercise the purchase option, so it is Capital lease ( finance lease ).

Step - ( 3 ) - Calculation of amount to be recorded as Lease liability -

	Particulars	Working note reference	Amount
A)	Present value of annual lease payments	# Working note - (1)	$75152.3
B)	Present value of amount payable at the end of lease period	# Working note - (2)	$6100.2
	Amount to be recorded as Lease liability ( A + B )		$81252.5

Hence, Option - ( C ) , Amount to be recorded as Lease liability = $81253 ( approx.) is correct.

# Working note - (1) - Calculation of Present value of annual lease payments -

	Particulars	Amount
A)	$10000 * 1	$10000
B)	$10000 * PVAF ( 7%, 9 years ) = $10000 * 6.51523	$65152.3
	Present value of annual lease payments ( A + B )	$75152.3

# Working note - (2) - Calculation of Present value of amount payable at the end of lease period -

	Particulars	Amount
A)	$12000 * PVF( 7% ,10 years ) = $12000 * 0.50835	$6100.2
	Present value of amount payable at the end of lease period	$6100.2