Kingslake Ltd signed a non-cancellable lease contract on 1 January 2012 for a machine that requires 5 annual payments of $200 000 at the start of each year. On the last annual payment, ownership will transfer from the lessor to Kingslake Ltd. The fair value of the asset if paid in cash is $75,964.
The following information is also available:

What is the implicit rate of this lease arrangement in accordance with AASB 117?

Question

Kingslake Ltd signed a non-cancellable lease contract on 1 January 2012 for a machine that requires 5 annual payments of $200 000 at the start of each year. On the last annual payment, ownership will transfer from the lessor to Kingslake Ltd. The fair value of the asset if paid in cash is $75,964.
The following information is also available:

What is the implicit rate of this lease arrangement in accordance with AASB 117?

Quizplus · Accepted Answer

To calculate the implicit rate of the lease arrangement, we need to use the present value of the minimum lease payments method, as required by AASB 117.

First, we need to calculate the present value of the minimum lease payments, which can be done using the formula:
PV of MLPs = PMT x [(1 - (1 / (1 + r)n)) / r]
where PMT is the annual lease payment, r is the implicit rate, and n is the number of lease payments.

Substituting the given values, we get:
PV of MLPs = $200,000 x [(1 - (1 / (1 + r)^5)) / r]

We can then equate this to the fair value of the asset, which is $75,964, to solve for r:
$75,964 = $200,000 x [(1 - (1 / (1 + r)^5)) / r]

Using a financial calculator or Excel, we can solve for r, which comes out to be approximately 16%. Therefore, the correct answer is C.

Kingslake Ltd Signed a Non-Cancellable Lease Contract on 1 January