Question

On January 1, 2023, Sandhill Inc. enters into a 5-year non-cancellable lease with Wilson Ltd. for equipment that has an estimated useful life of 5 years and a fair value of $1,994,000. Sandhill has an incremental borrowing rate of 8% and Wilson's implicit rate is 6%. Sandhill uses the straight-line depreciation method to depreciate assets. Sandhill will make annual lease payments on January 1 of each year (with the first payment due at the beginning of the lease) based on the fair value of the equipment. The lease agreement includes a guarantee that Sandhill will take over ownership of the equipment from Wilson for a final payment of $106,500. Both companies adhere to IFRS. (a) X Your answer is incorrect. Calculate the lease payment Wilson Ltd. will charge Sandhill Inc assuming that there is no mark up on the fair value of the equipment. (Round present value factor calculations to 4 decimal places, e.g. 12.5124.) Click here to view the factor table.

Answer 1

To calculate the lease payment Wilson Ltd. will charge Sandhill Inc., use the formula for present value of an annuity. The lease payment is $460,304.61.

Step-by-step explanation:

To calculate the lease payment Wilson Ltd. will charge Sandhill Inc., we need to determine the present value of the lease payments. The lease payments are based on the fair value of the equipment, which is $1,994,000. We can use the formula for calculating present value of an annuity to find the lease payment. The formula is: PV = PMT x [(1 - (1 + r)^-n) / r], where PV is the present value, PMT is the lease payment, r is the interest rate, and n is the number of periods.

Given that the equipment has an estimated useful life of 5 years and Sandhill uses the straight-line depreciation method, we can assume that the lease term is also 5 years. The incremental borrowing rate for Sandhill is 8% and Wilson's implicit rate is 6%. Plugging these values into the formula, we get:

PV = PMT x [(1 - (1 + 0.06)^-5) / 0.06] = $1,994,000

Solving for PMT, we find that the lease payment Wilson Ltd. will charge Sandhill Inc. is $460,304.61 (rounded to the nearest cent).