Question
Glaus Leasing Company agrees to lease equipment to Jensen Corporation on January 1, 2020. The following information relates to the lease agreement. 1. The term
Glaus Leasing Company agrees to lease equipment to Jensen Corporation on January 1, 2020. The following information relates to the lease agreement.
| 1. | The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. | |
| 2. | The cost of the machinery is $525,000, and the fair value of the asset on January 1, 2020, is $700,000. | |
| 3. | At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $50,000. Jensen estimates that the expected residual value at the end of the lease term will be 50,000. Jensen amortizes all of its leased equipment on a straight-line basis. | |
| 4. | The lease agreement requires equal annual rental payments, beginning on January 1, 2020. | |
| 5. | The collectibility of the lease payments is probable. | |
| 6. Glaus desires a 5% rate of return on its investments. Jensens incremental borrowing rate is 6%, and the lessors implicit rate is unknown.
Suppose Jensen expects the residual value at the end of the lease term to be $40,000 but still guarantees a residual of $50,000. Compute the value of the lease liability at lease commencement. |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Managerial Accounting Decision Making and Motivating Performance
Authors: Srikant M. Datar, Madhav V. Rajan
1st edition
132816245, 9780132816243, 978-0137024872
