Question

On January 1, 20X1, Tucker Company leases equipment from Franz Inc. over the equipment's entire estimated useful life of five years. Franz acquired the asset for $431,213 and normally utilizes an interest rate of 8% for these types of transactions. The annual rental payment is $100,000; the first payment is due on January 1, 20X1. At the commencement of the lease, Tucker should recognize it by

Answer 1

Tucker Company should recognize the lease as an operating lease at the commencement of the lease. They should record the leased equipment as an asset and the lease obligation as a liability on their balance sheet.

Step-by-step explanation:

When Tucker Company leases equipment from Franz Inc., they should recognize the lease as an operating lease at the commencement of the lease. This means that Tucker Company should record the leased equipment as an asset and the lease obligation as a liability on their balance sheet.

They should calculate the present value of the lease payments using the interest rate of 8%. In this case, the annual rental payment is $100,000 for 5 years, so the total lease payment is $500,000. Using the present value formula, the present value of the lease payments would be $382,333.63.

Therefore, Tucker Company should recognize the leased equipment as an asset of $431,213 and the lease obligation as a liability of $382,333.63 on January 1, 20X1.

Answer 2

At the commencement of the lease, Tucker should recognize it by $399,300.

Step-by-step explanation:

For the sake of this question, i assume that you are aware of the latest development "IFRS 16 - Leases".

In accordance with IFRS 16 - Leases, Tucker should recognise the lease liability.

Lease liability = Present value of lease payments that have not been paid.

Present value = This can easily be determined by the cumulative present value table.

The implicate rate of lease = 8% (as known in the question) will be used as discount factor.

Since, we know that the first payment is due, therefore, we will use the discount factor of 8% at year 5 = 3.993

Lease liability at January 1, 20X1 = $100,000 × 3.993 = $399,300.

Thank you.