Question

On December 31, 2019, Wildhorse Company leased machinery from Terminator Corporation for an agreed upon lease term of 3 years. Wildhorse agreed to make annual lease payments of $14,500, beginning on December 31, 2019. The expected residual value of the machinery at the end of the lease term is $7,250. Wildhorse guarantees a residual value of $7,250 at the end of the lease term, which equals the expected residual value of the machinery.

What amount will Wildhorse record as its lease liability if the expected residual value at the end of the lease term is $3,250 and Wildhorse guarantees a residual of $7,250. Its incremental borrowing rate is 5% and the implicit rate of the lease is unknown? (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answer to 0 decimal places, e.g. 5,275.)

Lease liability

$

Answer 1

Date	Lease Payment & GRV	PV factor @5%	Present Value $
December 31,2019	14,500	1	14,500
December 31,2020	14,500	0.95238	13,810
December 31,2021	14,500	0.90703	13,152
December 31,2022	7,250	0.86384	6,263
Total	50,750		47,725
Lease Liability	$ 47,725