Question

On January 2, 2021, Hanson Leasing Company leases equipment to Foley Co. with 5 equal annual payments of $240,000 each, payable beginning January 2, 2021. Foley Co. agrees to guarantee the $150,000 residual value of the asset at the end of the lease term. The expected value of the residual is $0. Foley's incremental borrowing rate is 10%, however, it knows that Hanson's implicit interest rate is 8%. The journal entry Hanson makes on January 2, 2021, includes a debit to a right-of-use asset for.

PV Annuity DuePV Ordinary AnnuityPV Single Sum
8%, 5 periods 4.31213 3.99271 .68508
10%, 5 periods 4.16986 3.79079 .62092
a. $897,674.
b. $1,034,910.
c. $1,061,013.
d. $1,137,673.

Answer 1

The correct answer is (d) $1137673

Step-by-step explanation:

Solution

Journal Entry:

The Equal annual payments 240000

X PV Annuity Due 8%, 5 periods 4.31213

Present value of Equal annual payments 1034911

The Residual value 150000

X PV Single 8%, 5 periods 0.68508

Present value of residual value 102762

Present value of Equal annual payment 1034911

Add: Present value of residual value 102762

The Debit to right-of-use asset 1137673