On January 1, Unity Sales Company entered into a lease agreement to lease a piece...
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Finance
On January 1, Unity Sales Company entered into a lease agreement to lease a piece of machinery for a period of 5 years from Bernie Boy Equipment (BBE).
Determine the implicit rate and the present value of the payments due under the lease.
The machine is not specialized for Unity's business needs, has a sales price of $62,000, and its useful life is 7 years with no guaranteed residual value. The $14,000 annual rentals are due on January 1 of each year. The lease does not contain a transfer of ownership or a purchase option. Assume that there are no initial direct costs associated with this lease. There are also no nonlease components. BBE's implicit rate is not known to Unity whose incremental borrowing rate is 10%. The carrying value of the equipment to BBE is $62,000, its fair value. Assume that collectability of all lease payments is reasonably assured. Unity's fiscal year ends on December 31
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