Final answer:
The amount to be recorded as the cost of an asset under a capital lease is equal to the present value of the minimum lease payments or the fair value of the asset, whichever is lower. If the present value of the minimum lease payments is lower than the fair value of the asset, then that amount is recorded as the cost. However, if the fair value of the asset is lower than the present value of the minimum lease payments, then the fair value is recorded as the cost. In addition, the present value of any unguaranteed residual value is also added to determine the total cost of the asset under a capital lease.
Step-by-step explanation:
The amount to be recorded as the cost of an asset under a capital lease is equal to the present value of the minimum lease payments or the fair value of the asset, whichever is lower.
If the present value of the minimum lease payments is lower than the fair value of the asset, then that amount is recorded as the cost. However, if the fair value of the asset is lower than the present value of the minimum lease payments, then the fair value is recorded as the cost.
In addition to the present value of the minimum lease payments, the present value of any unguaranteed residual value is also added to determine the total cost of the asset under a capital lease.