Question

Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $344,152, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. If Pisa, Inc.'s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%, what is the amount recorded for the leased asset at the lease inception

Answer 1

Answer: $1,231,066

Step-by-step explanation:

When recording a lease at inception, it needs to be recorded at the present value of it's periodic payments over it's lifetime using the implicit rate in the lease as a discount rate.

Seeing as the payments are equal over it's useful life, we can treat this as an Annuity.

Furthermore, with the first payment being due at lease inception, we would have to treat it like an Annuity due.

In the attached photo, you will see the PVIFA for a 4 year annuity due at 8%, using that figure we solve for the present value as follows,

= 344,152 * PVIFA due 8%, 4

= 344,152 * 3.57710

=$1,231,066

Amount recorded at inception is $1,231,066.