Question

Please and thank you

Sage Leasing Company agrees to lease equipment to Pronghorn Corporation on January 1, 2020. The following information relates to the lease agreement 1. 2. 3 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 $518,000, and the fair value of the asset on January 1, 2020, is $648,000. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $50,000. Pronghorn estimates that the expected residual value at the end of the lease term will be 50,000. Pronghorn 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. Sage desires a 11% rate of return on its investments. Pronghorn's incremental borrowing rate is 12%, and the lessor's implicit rate is unknown. 4. 5. 6. (Assume the accounting period ends on December 31.) Click here to view factor tables. Discuss the nature of this lease for both the lessee and the lessor. This is a for Pronghorn This is a for Sage

Answer 1

In the given question , the Lease term cover major part of economic life of asset even tital of asset is not transferred. Heance it is finance Lease .

This is a Finance Lease for Pronghorn

This is a Finance Lease for sage.

Calculation for Annual rental Payment required :

If Implicit Rate of lease is not given than Lessee's incremental borrowing rateshould be used .

Fair Value = present value of annual Lease + Present value of Guranteed residual value

Year	1	2	3	4	5	6	7
PVIF (12%)	0.89286	0.79719	0.71178	0.63552	0.56743	0.50663	0.45235

The Lease payment is given from the begining of the year. Heance present value of lease payment

= Lease rent * 1+(1+r)6

^{= Lease * 5.11138}

Present Value of Guranteed Residual value = 50000*0.45235 = 22617.50

Fair Value of asset = 648000

$\therefore$ Annual lease Payment = 648000-22617.50  divide by 5.11138

=

625382.50 5.11138

= $ 122351

Calculation For present value of minimum lease payment

YEAR DF (12%) MLP PV 0 1 122351 122351 1 0.89286 122351 109242 2 0.79719 122351 97537 3 0.71178 122351 87087 4 0.63552 122351 77757 5 0.5674 122351 69422 6 0.50663 122351 61987 7 0.45235 50000 22618 648001

DATE ACCOUNT Tital 01-01-2020 Equiptment A/C To Sage A/C (To record Lease) Debit Credit 648000 648000 122351 01-01-2020 Sage A/C To Bank A/C 122351 85428 31-12-2020 Depreciation A/ To Equiptment A/C 85248 77760 31.12.2020 interest on lease A/C To Sage A/C 77760 Interest (648000-122351)*.12

As first installment of lease paid in begining of the year , hence it is deducted from,minimum lease payment