A company leases a machine for its own use for four years with annual payments y
ID: 2799246 • Letter: A
Question
A company leases a machine for its own use for four years with annual payments year. At the end of the lease, the machine is returned to the lessor who will sell it incremental borrowing rate is 8% and the interest rate of $10,000 at the end of each for scrap value. The company's implicit in the lease is 6% a. 12 pointsy) Calculate the value of the leasehold asset and leasehold liability that the firm will record on its balance sheet at inception calculator Please show how you calculate the value or what inputs you enter into your b. (2 point) Calculate the depreciation expense the firm will recognize each year from this lease. c. (2 points) Calculate the value of the firm's lease liability at the end of the first year (2 points) Suppose a second firm had classified this as an operating lease, which firm would report higher cash flows from operating activities, the operating-lease firm or the capital-lease firm? Why? d. (2 points) Suppose before the initiation of the lease the machine had a carrying value of $30,000 on the lessor's balance sheet. The lessor is reasonably certain that he will collect the lease payments. Assume the lessor reports under GAAP. Which of the following is true? (Select one). e. i. The lessor would treat this as a sales-type lease and record zero profit at inception. i. The lessor would treat this as a sales-type lease and record a profit of about $4,650 at inception of the lease. ii. The lessor would treat this as a direct-financing lease and record a profit of about $4,650 at inception of the lease.Explanation / Answer
Answer:
1. Lease Liability:
PV of Lease Obligation @ 6% discount Rate: $10,000 discounted @6% for four years = $34,651.
Lease Payable for first Year: $34,651.
2. Lease Assets:
Principal Repayment which is reported in cash and cash equivalents.
B. Depreciation: $34,651/4 = $8,663.
C. Lease Liability at the end of first year : $26,130. ($34,651-10,000)*1.06
D. Capital Lease will report higher cash flow from operations.
E. Under U.S GAAP following conditions prevail for Finance Lease:
When PV of minimum lease payment is greater than carrying value then lease is termed as sales - type lease.
1. The Lessor will report this as a sales type lease and record $4,650 profit at the inception of the lease.
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