Riverbed Inc. manufactures an X-ray machine with an estimated life of 12 years a

Question

Riverbed Inc. manufactures an X-ray machine with an estimated life of 12 years and leases it to Chambers Medical Center for a period of 10 years. The normal selling price of the machine is $466,919, and its guaranteed residual value at the end of the non-cancelable lease term is estimated to be $15,700. The hospital will pay rents of $65,800 at the beginning of each year. Riverbed incurred costs of $275,000 in manufacturing the machine and $15,400 in legal fees directly related to the signing of the lease. Riverbed has determined that the collectibility of the lease payments is probable and that the implicit interest rate is 9%.

Compute the amount of each of the following items. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answers to 0 decimal places, e.g. 5,275.)

Lease receivable at commencement of the lease

Sales price

Cost of sales

Lease receivable at commencement of the lease

Sales price

Cost of sales

Explanation / Answer

Ans. 1 Calculation of sales price or fair value to be recorded in the books - this type of lease if finance lease because more than 2/3 life of machine it is using by leasee.

Annual rent = $65800

Sales price = $65800X PV @9% for years +$15700XPVFactor at the end of 10Yrs @9%

                  = $65800X 6.42+$15700X.422= 422436+6625 = $429061

Cost of sales = $275000+$15400 =$290400

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