90.2K

Verified Solution

Link Copied!

Company A is the Lessee.

Company B is the Lessor.

Company B rents an asset to Company A for a term of 3 years. The economic life of the asset is 3 years. Therefore, both Company A and Company B conclude that this lease contract is a Finance lease from Company As point of view. At the end of the lease term the asset is expected to have no residual value and so residual value is NOT a relevant matter to prepare the Lessees accounting.

The lease contract provides that lease payments are made in ADVANCE. The four equal annual Lease payments will be $10,000 and they will be made at the beginning of each year. You should describe the three years as YEAR 1, YEAR 2, YEAR 3. You should have the lease payments made on 1/1 of each year and each lease year runs from 1/1/ to 12/31. The residual value of the lease asset at the end of the lease term is expected to be $10,000 but is not guaranteed.

Company B discloses that is implied lease rate is 4%.

Use the following table for any Present Value or Annuity Factors you require for calculations:

Present Value & Annuity Factors from Chapter 6 of Kieso, et. al.s Intermediate Accounting 16th Edition
	FACTORS
YEAR n	PRESENT VALUE of 1 TABLE 6-2		FUTURE VALUE of 1 Table 6-1		PV of ORDINARY ANNUITY of 1 Table 6-4 Payments at End		PV of ANNUITY DUE of 1 Table 6-5 Payments at Beginning
Discount Rates (j)	3%	4%	4%	5%	4%	5%	3%	4%
1	.97087	.96154	1.04000	1.05000	.96154	.95238	1.00000	1.00000
2	.94260	.92456	1.08160	1.10250	1.88609	1.85941	1.97087	1.96154
3	.91514	.88900	1.12486	1.15763	2.77509	2.72325	2.91347	2.88609
4	.88849	.85480	1.16986	1.21551	3.62990	3.54595	3.82861	3.77509
5	.86261	.82193	1.21665	1.27628	4.45182	4.32948	4.71710	4.62990

1. Estimate the Fair Value of the leased asset from the Lessors point of view.

Answer & Explanation Solved by verified expert

See Answer