Question

On January 2, 2025, Wildhorse Leasing Company leases equipment to Pina Co. with 5 equal annual payments of $157000 each, payable beginning January 2, 2025. There is expected residual of $25000 but it is not guaranteed. Pina's incremental borrowing rate is 11%, however, it knows that WIldhorse's implicit interest rate is 9%. The lease is appropriately classified as a finance/sales-type lease. What will Wildhorse record as the sales price of the asset?

Answer 1

Step-by-step explanation:

To calculate the sales price of the asset (the present value of the lease payments), you can use the implicit interest rate of 9% provided by Wildhorse Leasing Company.

The lease payments are $157,000 each for 5 years, and there is an expected residual value of $25,000 at the end of the lease term.

You can calculate the present value of these payments using the implicit interest rate of 9%. The formula to calculate the present value of an annuity is:

PV = PMT x [(1 - (1 + r)^(-n)) / r]

Where:

PV = Present Value

PMT = Payment per period ($157,000)

r = Interest rate per period (9% or 0.09)

n = Number of periods (5 years)

PV = $157,000 x [(1 - (1 + 0.09)^(-5)) / 0.09]

PV ≈ $620,906.73

Now, add the expected residual value of $25,000 to the present value:

Sales Price = PV + Residual Value

Sales Price = $620,906.73 + $25,000

Sales Price = $645,906.73

So, Wildhorse Leasing Company will record the sales price of the asset as approximately $645,906.73.