Question 28 Larkspur Limited has signed a lease agreement with Lantus Corp. to l

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Question 28 Larkspur Limited has signed a lease agreement with Lantus Corp. to lease equipment with an expected lifespan of eight years, no estimated salvage value, and a cost to Lantus of $170,000. The terms of the lease are as follows: The lease term begins on January 1, 2016, and runs for 5 years. The lease requires payments of $43,973 at the beginning of each year starting January 1, 2016 which includes $5,900 for maintenance and insurance costs. At the end of the lease term, the equipment is to be returned to the lessor. Lantus, implied interest rate is 6%, while Larkspur's borrowing rate is 7%. Larkspur uses straight-line depreciation for similar equipment. The year-end for both companies is December 31 Assuming that both companies follow ASPE Click here to view the factor table Determine the present value of the minimum lease payments. (Round factor values to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g. 5,275.) Present Value$ By accessing this Question Assistance, you will learn while you earn points based on the Point Potential Policy set by your instructor. Attempts: 0 of 1 usedSAVE FOR LATER SUBMIT ANSWER

Explanation / Answer

Answer:28 (a)

Implicit Rate 6% Bank Borrowing Rate 7%

Pv of MLP $1,67,034 $1,70,000

PVIFA = ($38,073,6%,5 years) ($38,073,7%,5 year)

Fair Value of Assets $ 1,70,000

If Implicit Rate known and bank borrowing rate also given then

Lower of these two rates should be taken. Because Assets value not be more than its fair value.

So pv of mlp is being lower of two rates implicit rate and bank borrowing rate. I.e $1,67,034 or $1,70,000= $1,67,034/

Lease liability recognised at lower of PV of MLP or Fair Value.

i.e. lower of $1,67,034 or $1,70,000= $1,67,034

  

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