Question

On December 31, 2020, Reagan Inc. signed a lease with Silver Leasing Co. for some equipment having a seven-year useful life. 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, 2026. There is no purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease. Reagan's lease amortization schedule appears below: Decrease in Interest Balance Dec. 31 Payments 2020 2020 $73,300 2021 $73,300 2022 $73,300 2023 $73,300 2024 $73,300 2025 $73,300 2026 $29,300 $27,232 23,086 18,567 13,641 8,272 2,419 $73,300 46,068 50,214 54,733 59,659 65,028 26,881 Outstanding Balance $375,882 302,582 256,514 206, 301 151,568 91,909 26,881 At what amount would Reagan record the right-of-use asset at the beginning of the agreement? Multiple Choice O $439,800. O $302,582. O $469,100. O $375,882.

Answer 1

Answer: Option-(d): $375,882 Reason: Lease is an arrangement to hire an equipment or a capital asset by one firm or person from another firm or person for a commercial use with the objective of generating income from the leased asset. There are two types of lease arrangements such as capital lease and operating lease. Person who hires the asset under the lease term is known as lessee and ther person who offers the asset for use under the lease term is known as the lessor. Under the lease arrangement, only the right-to-use the asset is transferred to the lessee until the lease term expires. At the inception of the lease, the lessee must recognize a right-to-use as an asset which is equal to present value of future lease payments. Such asset shall be amortized over the lease term using implicit interest rate agreed upon. It is evidenced from the lease amortization table that the outstanding balance of the lease at the inception of lease on Dec. 31, 2020 is $375,882 which should be the amount that the lessee must recognize as right-to-use asset at the inception of lease as it would have been calculated by discounting future cash flows using implicit rate as discount rate. So, option-(d) is the correct answer.

Answer 2

The answer is D.