On January 1, Garcia Supply leased a truck for a four-year period, at which time
ID: 2541877 • Letter: O
Question
On January 1, Garcia Supply leased a truck for a four-year period, at which time possession of the truck will revert back to the lessor. Annual lease payments are $11,000 due on December 31 of each year, calculated by the lessor using a 5% discount rate. Negotiations led to Garcia guaranteeing a $39,800 residual value at the end of the lease term. Garcia estimates that the residual value after four years will be $38,600. (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.) What is the amount to be added to the right-of-use asset and lease liability under the residual value guarantee? Answer is not 71,748
Explanation / Answer
At the end of lease term, the lessee expects to make a payment of USd 1,200, i.e. USD 39,800-USD 38,600. Therefore, residual value payment will be considered for USD 1,200 as that is the amount expected to be paid by the entity. Detailed calculations are as follows:
PV Factor
Cash flow
PV of cash flow
0.95
11,000
10,476
0.91
11,000
9,977
0.86
11,000
9,502
0.82
11,000
9,050
0.82
39,800
1,200
Total
40,205
PV Factor
Cash flow
PV of cash flow
0.95
11,000
10,476
0.91
11,000
9,977
0.86
11,000
9,502
0.82
11,000
9,050
0.82
39,800
1,200
Total
40,205