Question

On January 1, Claude Co. leased a car for a four-year period, at which time possession of the car will revert back to the lessor. Annual lease payments are $10,700 due on December 31 of each year, calculated by the lessor using a 8% discount rate. Negotiations led to Claude guaranteeing the lessor a $32,100 residual value at the end of the lease term although Claude estimates that the residual value after four years will be $29,800. What is the amount to be added to the right-of-use asset and lease payable under the residual value guarantee? (Round your answer to the nearest whole dollar.) The present value of $1: n = 4, i = 8% is 0.73503. The present value of an ordinary annuity of $1: n = 4,1 = 8% is 3.31213. The present value of an annuity due of $1: n = 4,1 = 8% is 3.57710. Multiple Choice O $1,752 O $1,888 O $1,691 O $1,966

Answer 1

residual value guarantee = guaranteed residual value - expected residual value

residual value guarantee = $32,100 - $29,800

residual value guarantee = $2,300

present value of residual value guarantee = $2,300 * present value of $1: n=4, i=8%

residual value guarantee = $2,300 * 0.73503

residual value guarantee = $1,691

hence, the amount to be added to the right-of-use asset and lease payable under the residual value guarantee is $1,691

hence, the correct answer is C) $1,691

In case you have any query, kindly ask in comments.