Question

Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $72,000 under a 55−year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,700 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,700, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 66% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $1,300. Compute the present value of the lease payments in order to determine if the lease meets the fourth Group I criterion. Calculate the present value of each payment individually. Assuming that this is classified as an operating lease, what is the value of the right−of−use asset at the lease's commencement?

Answer 1

Check the explanation

Step-by-step explanation:

Calculation of Interest expense:

Lease Liability x Implicit Rate of Cost

Calculation of lease liability:

Beginning of Cash Flow

2020 10700

2021 10700

2022 10700

2023 10700

The sum of present values of above cash flows is equal to lease liability (Discounted at 4%

$38840

Interest Expense: Lease liability x Implicit Rate of Cost

= $ 38840 x 4% = $ 1553.60