On January 1, 2018, Jasperse Corporation leased equipment under a finance lease
ID: 2537169 • Letter: O
Question
On January 1, 2018, Jasperse Corporation leased equipment under a finance lease designed to earn the lessor a 9% rate of return for providing long-term financing. The lease agreement specified ten annual payments of $85,000 beginning January 1, and each December 31 thereafter through 2026. A 10-year service agreement was scheduled to provide maintenance of the equipment as required for a fee of $9,500 per year. Insurance premiums of $8,500 annually are related to the equipment. Both amounts were to be paid by the lessor and lease payments reflect both expenditures. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
At what amount will Jasperse record a right-of-use asset?
Explanation / Answer
Solution:
Annual lease payments at beginnig of lease = $85,000
Maintenance and insurance premium to be paid by lessor = $9,500 + $8,500 = $18,000
Effective annual lease payment solely for use of assets = $85,000 - $18,000 = $68,000
Rate of return to lessor (i) = 9%
Period of lease (n) = 10 years
Lease Payment = $68,000
Right of use assets = Annual lease payment * cumulative PV Factor of immediate annuity for 10 period at 9%
= $68,000 * 6.995247 = $475,677