Question

Careweezy Autoparts leased an industrial press from Snap-On Tools on January 1, 2021. The lease is...

Careweezy Autoparts leased an industrial press from Snap-On Tools on January 1, 2021. The lease is for a 3-year period ending December 31, 2023. Annual payments are $42,000 beginning with the first payment on January 1, 2021, and each December 31 through 2022. NAPA has the option to purchase the industrial press on December 30, 2023 for $51,000, and exercise of the option seems reasonably certain. The machine's estimated useful life is 6 years with no salvage value. The implicit rate of return in the lease is 12%.  Snap-On initially records the lease receivable at $149,283.

What will the balance be in the right-of-use asset account for NAPA Autoparts on December 31, 2022?

A.

$99,521
B.

$45,536
C.

$78,157
D.

$124,402
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Answer #1

Solution:

Right of use asset recorded by NAPA at beginning of lease = Present value of lease payment + Present value of purchase option

= $42,000 * Cumulative PV factor at 12% for 3 periods of annuity due + $51,000 * PV factor at 12% for 3rd period

= $42,000 * 2.69005 + $51,000*0.71178

= $112,982 + $36,301

= $149,283

Amortization expense for 2 years = $149,283 * 2/6 = $49,762

Right of use asset at 31.12.2022 = $149,283 - $49,762 = $99,521

Hence option A is correct.

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