Question

On December 31, 2019, Marin Corporation signed a 5-year, non-cancelable lease for a machine. The terms of the lease called for Marin to make annual payments of $8,566 at the beginning of each year, starting December 31, 2019. The machine has an estimated useful life of 6 years and a $4,500 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Marin uses the straight-line method of depreciation for all of its plant assets. Marin’s incremental borrowing rate is 7%, and the lessor’s implicit rate is unknown.

What type of lease is this?
Compute the present value of lease

Answer 1

The answer is given below;

Step-by-step explanation:

This is operating lease as the machine will revert back to lessor at the end of lease term.

Present value of lease=R(1-(1+i)^-n)/i

where R=8,566

i=7%

n=5 year

P=8,566(1-(1+)^-5)/.07

P=8,566*4.10=$35,122