Answer
1.
According to the Law, A lease must satisfy any one of the below conditions to qualify as Capital Lease
The lease is fulfilling 1st (As Useful life is 5 years and lease is of 4 years, more than 75%) condition so we need to satisfy only one condition to classify the lease as Capital Lease.
So this is Capital Lease.
2.
We should record the asset at present Value,
So,
Annual Payment = $11,000
Cost of capital = 9%
Lease life = 4 years
Present Value Annuity Factor (PVAF) @9% for 4 Years = 3.53129
Present Value (PV) @9% of 4th year = 0.70843
Present Value = (Annual Payment * PVAF @9% for 4 years) + (Salvage value * PV @9% of 4th year)
= ($11,000 * 3.53129) + ($6,000 * 0.70843)
= $43,094.77
We should record the asset at $43,094.77
3.
As we have discussed in 1st part, this is Capital lease to Lessor too.
4.
We first have to calculate how much amount we have to recover from the Lease, so
Amount to recover = Fair value of Asset – Present Value of Asset from Lessor Point of View
Fair Value = $45,114
Cost of capital = 10%
Lease life = 4 years
Present Value Annuity Factor (PVAF) @10% for 4 Years = 3.4868
Present Value (PV) @10% of 4th year = 0.68301
Present Value of Salvage Value = $15,000* 0.68301
Present Value of Salvage Value = $10,245.15
Amount to recover = Fair value of Asset – Present Value of Asset from Lessor Point of View
= $45,114 – 10,245.15
Amount to recover = $34,868.85
Now we will divide this amount by PVAF @10% for 4 Years
= $34,868.85 / 3.4868
= $10,000
Annual Lease payment = $10,000 + $1,000 (Lessor cost)
= $11,000
.
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On December 31, 2018, Yard Art Landscaping leased a delivery truck from Branch Motors. Branch paid...
On December 31, 2018, Yard Art Landscaping leased a delivery truck from Branch Motors. Branch paid $40,000 for the truck. Its retail value is $45,114. The lease agreement specified annual payments of $11,000 beginning December 31, 2018, the beginning of the lease, and at each December 31 through 2021. Branch Motors' interest rate for determining payments was 10%. At the end of the four-year lease term (December 31, 2022) the truck was expected to be worth $15,000. The estimated useful...
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