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On January 1, 2024, Cullumber Ltd. leased a machine from Oriole Equipment Ltd. The machine had cost Oriole $418,600 to manufacture, and would normally have sold for about $598,000. The lease was for 10 years and requires equal monthly payments of $6,620, which reflect an annual interest rate of 8%. While the machine is expected to have a total useful life of 12 years, Cullumber's management plans to return it to Oriole at the end of the 10 -year lease. Cullumber's management has also determined that the present value of the minimum lease payments was $545,630 at the time the lease was entered into. Calculate the impact that the lease will have in the frst month on Eountee s statement of financial position.

User Erewok
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The impact that the lease will have on the statement of financial position in the first month can be calculated by determining the amount of the lease liability that will be recorded. To calculate the lease liability, we need to calculate the present value of the minimum lease payments using the annual interest rate of 8% and the monthly payments of $6,620. The present value of the lease payments was given as $545,630 at the time the lease was entered into. Therefore, the impact of the lease on the statement of financial position in the first month is $104,599.

The impact that the lease will have on the statement of financial position in the first month can be calculated by determining the amount of the lease liability that will be recorded. To calculate the lease liability, we need to calculate the present value of the minimum lease payments using the annual interest rate of 8% and the monthly payments of $6,620. The present value of the lease payments was given as $545,630 at the time the lease was entered into.

To calculate the present value of the lease payments, we can use the present value of an ordinary annuity formula. Applying the formula:

Present Value = Payment x [1 - (1 + i)^-n] / i

Where:

- Payment = $6,620

- i = 8% / 12 = 0.67%

- n = 10 years x 12 months/year = 120 months

Substituting these values into the formula, we get:

Present Value = $6,620 x [1 - (1 + 0.67%)^-120] / 0.67%

Calculating this expression, the present value of the lease payments is approximately $523,199.

Therefore, the impact of the lease on the statement of financial position in the first month can be calculated as the difference between the present value of the lease payments ($523,199) and the cost of the machine to manufacture ($418,600).
Impact on Statement of Financial Position = Present Value of Lease Payments - Cost of Machine to Manufacture = $523,199 - $418,600 = $104,599

User Faegy
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