Question

On January 1, 2021, Jasperse Corporation leased equipment under a finance lease designed to earn the lessor a 11% rate of return for providing long-term financing. The lease agreement specified ten annual payments of $120,000 beginning January 1, and each December 31 thereafter through 2029. A 10-year service agreement was scheduled to provide maintenance of the equipment as required for a fee of $5,000 per year. Insurance premiums of $4,000 annually are related to the equipment. Both amounts were to be paid by the lessor and lease payments reflect both expenditures. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) At what amount will Jasperse record a right-of-use asset? (Round your answers to the nearest whole number.) PV factors based on Table or Calculator function: PVAD of $1 Lease Payment Right-of-use asset

Answer 1

Solution

Jasperse Corporation

Determination of the amount the company would record a right of use asset:

Annual payments = $120,000

Annual maintenance = $5,000

Rate of interest = 11%

Period, n = 10

Right of use asset = (120,000 – 5,000) x PVAD, 11%, 10

= 125,000 x 6.53705 = $817,131

Right-of-use asset = $817,131