Metcalf Company leases a machine from Vollmer Corp. under an agreement which mee
ID: 2494520 • 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??
Explanation / Answer
Metcalf should record the leased asset at
= Payments to be made at the beginning of each year * PVF of borrowing rate
= $136000* 4.79079
=$651547.44
$20,000 is not added to total cost as they are already included in lease payments.