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In computing the present value of the lease payments, the lessee should a. use its incremental...

In computing the present value of the lease payments, the lessee should a. use its incremental borrowing rate in all cases. b. use both its incremental borrowing rate and the implicit rate of the lessor, assuming that the implicit rate is known to the lessee. c. use the implicit rate of the lessor, assuming that the implicit rate is known to the lessee. d. use the implicit rate in all cases.

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Answer #1

OPTION C - use the implicit rate of the lessor, assuming that the implicit rate is known to the lessee

Explanation

A lessee shall measure the lease liability at the present value of the lease payments that are not paid at that date. The lease payments shall be discounted using the interest rate implicit in the lease, if that rate can be readily determined. If that rate cannot be readily determined, the lessee shall use the lessee’s incremental borrowing rate.

Hence while computing the present value of the lease payments, the lessee should use the implicit rate of the lessor if it is known to the lessee. If it is not known the lessee can use the lessee's incremental borrowing rate.

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