Problem 6-31 Present value calculation-capital lease LO 8,10 Reter o ured the us
ID: 2521653 • Letter: P
Question
Problem 6-31 Present value calculation-capital lease LO 8,10 Reter o ured the use of a machineby agreeing to pay the man Table 5-5 (Use appropriate factor from the tables provided.) actrer ofthe machine S1000 per year for 6 years. At the time the lease was sned, the ite estate tradyeri ?14 ?. Calculate the amount that Rener Co. could have paid atthe beginning of the lease to buy the machine outright Round your answer to 2 decimal places, b. What causes re dimerence between the amount you calculated in parta and the total of $6.000 ($1,000 per year for 6 years) mat Renter Co w pay under the terms of the lease? O The diflerence between the total amount paid and the present value of the lease payments is interest The diflerence between the total armount paid and the present value of the lease payments is depreciation. O The difference between the total amount paild and the present valusof the lease payments is taxes e. What is the approprate amount of oost to be reported in Renter Co 's balance sheet (at the time the lease was signed) with respect to this asset? (Round your answer to 2 decimai placesJ MacBook Ai 8 3 4 5 6 8 9Explanation / Answer
Payment will be maid in the form of an annuity, we need to finr present value of annuity.
Present value of annuity is the present worth of cash flows that is to be received in the future, if future value is known, rate of interest in r and time is n then PV of annuity is
PV of annuity = P* [1- (1+ r) ^-n]/ r
Where,
Periodic deposit (P) = $1000
Interest rate = 14%
Time (n) = 6
Let's put all the values in the formula to find PV o annuity
= 1000* [1- (1+ 0.14)^-6]/ 0.14
= 1000* [1- (1.14)^-6]/ 0.14
= 1000* [1- 0.4555865477]/ 0.14
= 1000* [0.5444134523/ 0.14]
= 1000* [3.88866751642857]
= 3888.67
So in the beginning total payment that will be maid is $3888.67
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The dirrerence is due to the fact that we have depreciated the annual amount that will be paid, the excess amount above 3889 is interest rate @ 14%. So correct answer is A
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The cost that will be reported is $1000