On December 31, 2010, Reagan, Inc., signed a lease for some equipment having a 9

Question

On December 31, 2010, Reagan, Inc., signed a lease for some equipment having a 9-year useful life with Silver Leasing Co. The lease payments are made by Reagan annually, beginning at signing date. Title does not transfer to the lessee, so the equipment will be returned to the lessor on December 31, 2016. There's no bargain purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease.

Reagan’s lease amortization schedule appears below:

   Dec 31              Payment               Interest                     decrease payment               balance

2010                                                                                                                                $519,115

2010                    $90,000                                                      $90,000                             429,115

2011                     $90,000                  $17,165                       $72,835                             356,280

2012                     $90,000                   $14,251                      $75,749                              280,531

2013                      $90,000                  $11,221                       $78,779                             201,752

2014                       $90,000                 $8,070                         $81,930                              119,822

2015                       $90,000                 $4,793                          $85,207                              34,615

2016                        $36,000                 $1,385                          $34,615                              0

At what amount would Reagan record the leased asset at inception of the agreement?

A. $540,000

B. $576,000

C. $429,115

D. $519,115

Explanation / Answer

The question is not very clear.

The conditions say that the title of the equipment will not be transferred to Reagan Inc at the end of the Lease period and there is no bargain purchase option, so ideallt it should not be a Cpiatl Lease. However, the lease life is >75% of useful life and the lessee guarantees a residual value. Assuming for these factors that it is treated as Capital Lease. The value of the equipment not given. The PV of lease payment @4% discount rate (derived from payment chart) is $519,115

So The Leased Asset cam be recorded as $519,115 in the inception of the Lease

Lease Pymts PV Factor @4% PV of lease rental Yr 1         90,000.0                    1.0         90,000.0 Yr 2         90,000.0               0.962         86,538.5 Yr 3         90,000.0               0.925         83,210.1 Yr 4         90,000.0               0.889         80,009.7 Yr 5         90,000.0               0.855         76,932.4 Yr 6         90,000.0               0.822         73,973.4 Yr 7         36,000.0               0.790         28,451.3 Total      519,115.3

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.