Question

Carla Leasing Company agrees to lease equipment to Sarasota Corporation on January 1, 2020.

The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. The cost of the machinery is $541,000, and the fair value of the asset on January 1, 2020, is $760,000. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $45,000. Sarasota estimates that the expected residual value at the end of the lease term will be 45,000. Sarasota amortizes all of its leased equipment on a straight-line basis. The lease agreement requires equal annual rental payments, beginning on January 1, 2020. The collectibility of the lease payments is probable. Carla desires a 10% rate of return on its investments. Sarasota’s incremental borrowing rate is 11%, and the lessor’s implicit rate is unknown.
Present value of minimum lease payments $ 732133

Answer 1

Refer the below images for the above mentioned questions, in a detailed way of solution with explanation.

Solution Requirement @ : present value of minimum lease payments : calwlation of annual payments : $760000 (9 45000+ 0.5 132 *) 5.3553) = $137603 * a* present value of dr at lol- for present value of an annuity due 7 at periods - 101 for 7 periods. present value of minirom hease payments : py of annual payments : payments : & 137603 x 3 137603 X 3.23034" 24719738 & present value of an answity due at iple for a periods. Because the guaranteed residuol value is casual to the expected residual value, the lessee would not include any amount of the quaranteed residual value in it calwlation of the initial lease liability. Note that Sarasota's used its incremental a borrowing borrowing rate rate dos because Sarasota because not know the amptat rate. The lease liability only includes the amount expected to be owned onder a residual value guarantee. This contrasts. with the classification test, which includes the full value of guaranted residual. The classification rest would be performed as done below:

pv.of prof annual payments = $ 137663 X 5.23054 guaranteed residual value = $ 45000 x .0.4817 pr. of minimum lease payments $719 738 & 21677 $741415 (Now: periods. & Present value of an & & Present Value of annuity due $ 1 at alt at for wt for 7 a periods. - - Requirement (b (6): : Suppose Suppose Sarasota sova expects the residual value at the end of lease term to be $35000 but still quarantees a residual of f 45000 Compute the value of the lease liability at lease commencement p.v.of annual payments : & 137603 75.23054 - 47 19738 puot amount probable to :((9 45000 - 435000) 40.4817 + 7 = 94817 I be owned - Lease liability → $724555 at 119. * ** present present value of an annuity value at si for de for of periods a periots at ut in this case, the guaranteed residual value is greater than the expected residual wawe Therefore, the lessee most include the p.v. of the amount probable to be owned under the quaranteed residual value in its calculation of the unitial lease tability.