On January 1, Garcia Supply leased a truck for a five-year period, at which time

Question

On January 1, Garcia Supply leased a truck for a five-year period, at which time possession of the truck will revert back to the lessor. Annual lease payments are $19,500 due on December 31 of each year, calculated by the lessor using a 6% discount rate. Negotiations led to Garcia guaranteeing a $93,700 residual value at the end of the lease term. Garcia estimates that the residual value after four years will be $91,900. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) What is the amount to be added to the right-of-use asset and lease liability under the residual value guarantee? mount to be added

Explanation / Answer

If a cash payment under a lessee-guaranteed residual value is predicted, the present value of that payment is added to the present value of the lease payments the lessee records as both a right-of-use asset and a lease liability. Likewise, it also adds to the amount that the lessor records as a lease receivable.

Amount to be added to the right-of-use asset and lease liability:

($93,700-$91,900=$1,800) * .747258** = $1345

** Present value of $1: n = 5, i = 6%

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