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X 18.7-11a Question Help On January 1, 2019, Precision Pumps leases nonspecialized pumping equipment to Mega Construction. The equipment is delivered on January 1. The lease term is 4 years with no renewal or purchase options, and title to the leased asset is retained by the lessor at the end of the lease term. The lease requires annual fixed rental payments of $7,000 per year beginning on January 1, 2019, and then December 31 of each year starting on December 31, 2019. The fair value of the equipment is $37,119 and has a carrying amount on Precision's books of $25,241. The equipment has a remaining life of 8 years. The estimated residual value of the equipment is $15,400. The lessee does not guarantee the residual value, but Precision secured an unrelated third party to guarantee $15,400, collection of this guaranteed residual value and lease payments are reasonably certain. The rate implicit in the lease is 7%. There are no prepaid rentals, and neither party to the agreement pays initial direct costs. What is the balance in the net investment in the lease account after the first payment? XA. $18,370 O B. $35,011 *C. $30,119 OD. $25,227

Answer 1

Answer -

Step - ( 1 ) - Information Given -

On January 1, 2019, Precision Pumps leases non-specialized pumping equipment to Mega Construction.

The equipment is delivered on January 1. The lease term is 4 years with no renewal or purchase options, and title to the leased asset is retained by the lessor at the end of the lease term.

The lease requires annual fixed rental payments of $7000 per year beginning on January 1, 2019, and then December 31 of each year starting on December 31, 2019.

The fair value of the equipment is $37,119 and has a carrying amount on Precision's books of $25,241. The equipment has a remaining life of 8 years.

The estimated residual value of the equipment is $15,400. The lessee does not guarantee the residual value, but Precision secured an unrelated third party to guarantee $15,400.

The rate implicit in the lease is 7%.

.

Step - ( 2 ) - Calculation of the Balance in the Net investment in the lease account after the first payment -

# Working note - (1) - Calculation of Present Value of Annual lease payments remaining -

Formula =

Present Value = p [ 1 - ( 1 + r )-n / r ]

Here,

p = Annual lease payments = $7000.

r = Rate implicit in the lease = 7%.

n = Time period for number of annual lease payments remaining = ( Total number of annual lease payments - Number of annual lease payments made ) = ( 4 - 1 ) = 3 annual periods.

Putting the values in the above formula we get -  

Present Value of Annual lease payments remaining =

= $7000 [ 1 - ( 1 + 0.07 )^-3 / 0.07 ]

= $7000 * 2.62431604443

= $18370 [ rounded off to zero decimal places ]

# Working note - (2) - Calculation of Present Value of Estimated residual value of the equipment -

Formula =

Present Value = ERV / ( 1 + r )n

Here,

ERV = Estimated residual value = $15400.

r = Rate implicit in the lease = 7%.

n = Year of realization of Estimated residual value = 4^th year [ because the lease term is 4 years ]

Putting the values in the above formula we get -

Present Value of Estimated residual value of the equipment =

= $15400 / ( 1 + 0.07 )⁴

= $15400 / 1.31079601

= $11749 [ rounded off to zero decimal places ]

Therefore, The Balance in the Net investment in the lease account after the first payment =

= Present Value of Annual lease payments remaining + Present Value of Estimated residual value of the equipment

= Working note - (1) + Working note - (2)

= $18370 + $11749

= $30119

.

Step - ( 3 ) - Conclusion -

The Balance in the Net investment in the lease account after the first payment = $30119.

Hence, Option - ( c ) $30119 is Correct.