Metcalf Company leases a machine from Vollmer Corp. under an agreement which mee
ID: 2458944 • Letter: M
Question
Metcalf Company leases a machine from Vollmer Corp. under an agreement which meets the criteria to be a capital lease for Metcalf. The six-year lease requires payment of $136,000 at the beginning of each year, including $20,000 per year for maintenance, insurance, and taxes. The incremental borrowing rate for the lessee is 10%; the lessor’s implicit rate is 8% and is known by the lessee. The present value of an annuity due of 1 for six years at 10% is 4.79079. The present value of an annuity due of 1 for six years at 8% is 4.99271. Metcalf should record the leased asset at
$679,008.
$651,548.
$579,154.
$555,732.
Explanation / Answer
Calculation of value of leased assets:
Annual Payment at the beginning of each year = $136000
Present value of an annuity due of 1 for six years at 10% is 4.79079
Hence,
Value of leased asset = 136000 * 4.79079 = $ 651,548