Question

On January 1, 2019 Day Co. leased a new machine from Parr with the following pertinent information: Lease term 6 years Annual rental payable at the beginning of each year $50,000 Useful life of machine 8 years Day's incremental borrowing rate 15% Implicit interest rate in lease (known by Day) 12% Present value of annuity of 1 in advance for 6 periods at 12% 4.61 15% 4.35 The lease passes ownership of the machine to Day at the termination of the lease. The cost of the machine on Parr's accounting record is $375,500. Hint: see bottom of pages 839 - 841 (chapter 15) of your text book for an illustrative example. Please write your answers in the space provided in each question. QUESTIONS: 1. At the beginning of the lease term, Day should record a lease liability of a. $375,500 b. $230,500 c. $217,500 d. $0

Answer 1

Ans :- 1

The lease term of 6 year is 75% of the useful life of machine (8 year) . The PV of the minimum lease of the lessee incremental borrowing rate (15%) or the implicit rate used by the lessor if known by the lessee (12%) .The lease liability payment is $230500 (4.61*$50000)

So correct option is $230500

Ans:- 2

The lease is a capital lease because the lease term of 6year is 75% of the useful life of the machine (8 year).