Question

On December 31, 2020, Lessee Inc. leased from Lessor Inc., machinery with a fair value of $ 800,000. The contract is for 10 years, non-cancellable and establishes annual payments of $ 138,567 starting on December 31, 2020. The useful life of the asset is 10 years. At the end of the contract term, the asset will return to the lessor. The lessee's incremental borrowing rate is 15%. The lessee was unable to determine the 12% implicit interest rate because the residual value of the asset is not mentioned in the contract. In the Statement of Financial Position as of December 31, 2020, Lessee Inc. must report a net lease liability for

Select one:

a. $ 738,321

b. $ 876,888

c. $ 661,432

d. $ 800,000

In the situation described in the previous question, how should Lease Inc. classify this lease?

Select one:
a. Financial
b. Direct Financing
c. Operational
d. Sale Type

Answer 1

OPTION A----$738321.

Since Net Lease liability would be present value of remaining lease payments for 9 years , discounted at rate of 12%.. Discounted value of $138567 for each year @12% till 9 years will amount $ 738321.

PVF @12%	Lease Payments	PVF * Lease payments
0.893	138567	123740.331
0.797	138567	110437.899
0.712	138567	98659.704
0.636	138567	88128.612
0.567	138567	78567.489
0.507	138567	70253.469
0.452	138567	62632.284
0.404	138567	55981.068
0.361	138567	50022.687
		738423

Slight change in figure due to round off in PVF used.

Part 2) OPTION C----- Operating Lease

Since ownership and risks and rewards of assets lies with Lessor