Question

Arena Corp. leased equipment from Bolton Corp. and correctly classified the lease as a finance lease. The present value of the annual lease payments at lease inception was $1,000,000. The present value of the maintenance and service obligations to be paid by Bolton was $50,000, and the fair value of the equipment at lease inception was $900,000. What amount should Arena report as the finance lease obligation at the lease's inception?

Answer 1

Answer: 1,000,000.00

Step-by-step explanation:

Arena should report a finance lease obligation at $1,000,000, the present value of the lease payments. The $50,000 executory costs are separate from the lease payments and do not count in the present value calculation. They do not reflect a component of the minimum lease payment. The fair value of the equipment is extra information. The lease liability is based on the present value of the lease payments, not the fair value of the leased asset, even though they are often the same.

Answer 2

The correct answer is $900,000

Step-by-step explanation:

Arena Corp. should record the asset and the lease obligation at the lower of the fair value of the asset at the inception of the lease.

In this case, The fair value is $900,000 and its precise amount to record. Keep in mind that Executory costs aren´t included in the lease obligation.