Question

On January 1, Garcia Supply leased a truck for a five-year period, at which time possession of the truck will revert back to the lessor. Annual lease payments are $13,000 due on December 31 of each year, calculated by the lessor using a 6% discount rate. Negotiations led to Garcia guaranteeing a $60,400 residual value at the end of the lease term. Garcia estimates that the residual value after four years will be $58,800. (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 1

The lease liability and right-of-use asset should include the present value of both the annual lease payments and the residual value guarantee that Garcia Supply has committed to at a 6% discount rate.

Step-by-step explanation:

The student is asking about the accounting for a finance lease under the new leasing standards, which require both an asset and liability to be recognized on the balance sheet for the rights and obligations created by the lease. The lease payments are treated as a way to finance the purchase of the leased asset over time. Since the lease includes a residual value guarantee, the guaranteed residual value must also be included in the initial measurement of the lease liability and corresponding right-of-use asset.

Under these rules, the calculation of the lease liability would include not only the present value of the lease payments but also the present value of the residual value guarantee. As Garcia is guaranteeing $60,400 as the residual value, this amount would be discounted back at the 6% rate and added to the present value of the lease payments to determine the total lease liability and right-of-use asset. Kindly note that the exact present value would require the appropriate present value factor, which is not provided in the details given.

Assuming the lease payments are properly discounted using the 6% rate over the five-year term of the lease, and a similar present value calculation is made for the $60,400, the sum of these two present values would give us the lease liability and the initial value of the right-of-use asset that Garcia Supply would record on January 1.

Answer 2

The lease liaiblity will include additional 45,134.39 dollars for the residual value guarantee

Step-by-step explanation:

We need to add to the present value of the lease payment, the present value of the guaranteed residual valueas this is part of the lease liaiblity as well.

`(Maturity)/((1 + rate)^(time) ) = PV`

Maturity 60,400.00

time 5.00

rate 0.06

`(60400)/((1 + 0.06)^(5) ) = PV`

PV 45,134.39

The gain or loss based on the residual value will be considered at the end of the useful life of the truck. The expected fair value at the end of the lease has no relevance