Question

Beachmont Restaurants, Inc. enters into a lease for standard stoves and grills. The lease term is 3 years with no renewal or purchase options. There is no residual value guarantee, and the lease terms do not provide for a transfer of title. The economic life of the asset is 10 years. According to the terms of the lease contract, Beachmont is required to pay rentals of $700 for the first year with payments increasing by 15% per year for Years 2 and 3. All lease payments are made on January 1. The implicit rate in the lease is 6%. The fair value of the assets is $9,000. Beachmont knows the lessor’s implicit rate. Beachmont’s fiscal year ends on December 31.

a. Determine the value of the right to use asset and lease liability at commencement of the lease.

Answer 1

Solution a:

Lease Period = 3 years

Implicit rate = 6%

Value of right to use asset = Present value of lease payment

Right to use Asset
Year	Lease payment	PV factor (6%)	Present value
1	$700.00	1.000000	$700.00
2	$805.00	0.943396	$759.43
3	$925.75	0.889996	$823.91
Value of right to use asset or lease liability			$2,283.35