question archive On January 1, 20x1, Entity X (Customer) enters into a 4-year lease of equipment with Entity Y (Supplier)
On January 1, 20x1, Entity X (Customer) enters into a 4-year lease of equipment with Entity Y (Supplier)
Subject:AccountingPrice:2.87 Bought7
On January 1, 20x1, Entity X (Customer) enters into a 4-year lease of equipment with Entity Y (Supplier). The annual rent is ?220,000, payable at the end of each year. The equipment has a remaining useful life of 10 years. The interest rate implicit in the lease is 10% while the lessee's incremental borrowing rate is 12%. Entity X uses the straight-line method of depreciation. The relevant present value factors are as follows:- PV of an ordinary annuity of ?1 @10%, n=4............ 3.16987- PV of an ordinary annuity of ?1 @12%, n=4............ 3.037351. How much is the lease liability to be recognized by Entity X on initial recognition?
A. 697,371
B. 668,217
C. 0
D. 702,345
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Answer:
B. 668,217
Present value of lease payments=220000*3.037351=668,217
The incremental borrowing rate is used as the same is rate for lessee.
Normally lessee uses interest rate implicit for discounting.
