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Giselle Ltd enters into a finance lease agreement on the following terms. What is the fair value of the equipment at the ince

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Answer #1

Answer

Correct option - $33,121

Explanation

Given,

Duration of the lease = 4 years.

Annual lease payments =$10,000

Interest rate implicit in lease = 8%

Fair value of the equipment is the present value of all the lease payments and any residual value that is guaranteed by the lessee.

Here as the guaranteed and unguaranteed residual values are given as $0. Hence the fair value of the equipment will be the present value of all the lease payments.

End of year

Annual payment

Interest rate

Annuity factor

Present value

1-4

$10,000

8%

3.3121

$33,121

($10,000 * 3.3121)

Note -

Bargain purchase option ($4,000) is the right to buy the asset at the end of the lease period for less than the estimated market value of the equipment. Hence this won’t be included in calculating the present value of the equipment.

           

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