Question

g On January 1, Garcia Supply leased a truck for a three-year period, at which time possession of the truck will revert back to the lessor. Annual lease payments are $10,500 due on December 31 of each year, calculated by the lessor using a 4% discount rate. Negotiations led to Garcia guaranteeing a $27,400 residual value at the end of the lease term. Garcia estimates that the residual value after four years will be $26,300. (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 amount to be added to the right-of-use asset and lease liability under the residual value guarantee is $904.12.

Step-by-step explanation:

Guaranteed residual value = $27,400

Estimated residual value = $26,300

Difference in residual value = Guaranteed residual value - Estimated residual value = $27,400 - $26,300 = $1,100

Present value of difference in residual value = Difference in residual value / (100% + Discount rate)^Number of years = $1,100 / (100% + 4%)^5 = $904.12

Therefore, the amount to be added to the right-of-use asset and lease liability under the residual value guarantee is $904.12 which is the present value of difference in residual value.