Question
assume that CNH Capital (NLD) (a subsidiary of CNH Global) and Ivanhoe Mines Ltd. (CAN) sign a lease agreement dated January 1, 2019, that calls
assume that CNH Capital (NLD) (a subsidiary of CNH Global) and Ivanhoe Mines Ltd. (CAN) sign a lease agreement dated January 1, 2019, that calls for CNH to lease a backhoe to Ivanhoe beginning January 1, 2019.
The terms and provisions of the lease agreement and other pertinent data are as follows.
Terms and provisions of the lease agreement:
The term of the lease is five years. The lease agreement is non-cancelable, requiring equal rental payments of 20,711.11 at the beginning of each year (annuity-due basis).
The backhoe has a fair value at the commencement of the lease of 100,000, an estimated economic life of five years, and a guaranteed residual value of 5,000. (Ivanhoe expects that it is probable that the expected value of the residual value at the end of the lease will be greater than the guaranteed amount of 5,000.)
The lease contains no renewal options. The backhoe reverts to CNH Capital at the termination of the lease.
Ivanhoes incremental borrowing rate is 5 percent per year. Ivanhoe depreciates its equipment on a straight-line basis.
CNH sets the annual rental rate to earn a rate of return of 4 percent per year; Ivanhoe is aware of this rate.
Instructions:
a) Ivanhoe computes the lease liability and the amount capitalized as a right-of-use asset(P/A,5,4%=4.62990)
b) Ivanhoe records the finance lease on its books on January 1, 2019
c) Ivanhoe records the first lease payment on January 1, 2019
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started