Question

What is Initial Lease Liability

Problem 21A-8 a2-c (Part Level Submission) Windsor Inc. manufactures an X-ray machine with an estimated life of 12 years and leases it to Sheridan Medical Center for a period of 10 years. The normal selling price of the machine is $482,998, and its guaranteed residual value at the end of the non-cancelable lease term is estimated to be $15,500, The hospital will pay rents of $60,800 at the beginning of each year. Windsor incurred costs of 5242,000 in manufacturing the machine and $14,700 in legal fees directly related to the signing of the lease. windsor has determined that the collectibility of the lease payments is probable and that the implicit interest rate is 6%. Sheridan Medical Center has an incremental borrowing rate of 6% and an expected residual value at the end of the lease of $10,000 Click here to view factor tables (a2) Your answer is incorrect. Try again. Compute the amount of the initial lease liability. (Round present value factor calculations to 5 decimal places, e.g.1.25124 and the final answer to o decimal places e.g.5,275 Initial Lease Liability 479,927 Click if you would like to Show Work for this question: en Show Work Attempts: 2 of 3 used SAVE FOR LATER

Answer 1

Initial lease liability will be :-

Year	Lease Rent ($)	Present value factor (6%)	Amount ($)
1	60,800	1	60,800
2	60,800	0.94340	57,359
3	60,800	0.89000	54,112
4	60,800	0.83962	51,049
5	60,800	0.79209	48,159
6	60,800	0.74726	45,433
7	60,800	0.70496	42,862
8	60,800	0.66506	40,436
9	60,800	0.62741	38,147
10	60,800	0.59190	35,988
10	10,000 (residual value)	0.59190	5,919
			480,264

Initial lease liability is $480,264

Present value factor for year 1 will be 1 because hospital will pay lease rent in the beginning of year.

Expected residual value at the end of lease from the view point of lessee will be considered ($10,000)