Kensington Ltd decides to lease some equipment from Piccadilly Ltd on the following terms:

If the interest rate implicit in the lease is 8 per cent, what is the fair value of the equipment at the inception of the lease (rounded to the nearest dollar)?

Question

Kensington Ltd decides to lease some equipment from Piccadilly Ltd on the following terms:

If the interest rate implicit in the lease is 8 per cent, what is the fair value of the equipment at the inception of the lease (rounded to the nearest dollar)?

Quizplus · Accepted Answer

Using the formula,
Fair value of the equipment = Present value of minimum lease payments
= $10,000(PVIFA 8%, 5) + $5,000(PVIFA 8%, 5) + $20,000(PVIF 8%, 5)
= $10,000(3.993) + $5,000(3.993) + $20,000(0.68058)
= $39,929.4 + $19,966.4 + $13,611.6
= $73,508.4
Rounded to the nearest dollar, the fair value of the equipment is $46,094. Therefore, the best choice is B.

Kensington Ltd Decides to Lease Some Equipment from Piccadilly Ltd