ABC Company leased a tooling machine on January 1, 2018, for a four-year period
ID: 2605978 • Letter: A
Question
ABC Company leased a tooling machine on January 1, 2018, for a four-year period ending December 31, 2021. The lease agreement specified annual payments of $25,000 beginning with the first payment at the beginning of the lease, and each December 31 through 2020. The company had the option to purchase the machine on December 30, 2021, for $16,000 when its fair value was expected to be $24,000 a sufficient difference that exercise seems reasonably certain. The machine's estimated useful life was six years with no salvage value. ABC was aware that the lessor’s implicit rate of return was 10%. The amount ABC should record as a right-of-use asset and lease liability for this finance lease (before the first payment) should be:
a. $85,346
b. $90,648
c. $98,099
d. $80,672
Explanation / Answer
The correct answer is c. $98,099
Particulars Amount$ Present Value of lease payment PV annuity due @ 10% for 4 years[$25000+($25000*2.48685)] = [$25000+62171) 87,171 Add: Present Value of Bargain purchase price at end of 4 years ($16000*0.68301) 10928 Present value of leasee's minium lease payment 98,099