On 1 January 2012 Dobel Ltd signed a ten-year non-cancellable lease that requires a payment of $100 000 at the end of each year. Ownership of the leased asset remains with the lessor at expiry of the lease. The incremental borrowing rate of Dobel Ltd is 12% while the implicit rate of the lessor known to Dobel Ltd is 10%.
The following information is also available:

At what amount should the leased property be recorded in the books of Dobel Ltd?

Question

On 1 January 2012 Dobel Ltd signed a ten-year non-cancellable lease that requires a payment of $100 000 at the end of each year. Ownership of the leased asset remains with the lessor at expiry of the lease. The incremental borrowing rate of Dobel Ltd is 12% while the implicit rate of the lessor known to Dobel Ltd is 10%.
The following information is also available:

At what amount should the leased property be recorded in the books of Dobel Ltd?

Quizplus · Accepted Answer

To calculate the present value of the lease payments we need to use the implicit rate of 10%. Using this rate, we can calculate the present value of the lease payments as follows:

PV of lease payments = $100,000 x [(1 - (1 / (1 + 0.10)^10)) / 0.10]
PV of lease payments = $614,460

Since the present value of the lease payments is greater than 90% of the fair value of the leased property ($700,000 x 90% = $630,000), the leased property should be recorded on the balance sheet of Dobel Ltd at the present value of the lease payments, which is $614,460. Therefore, the correct answer is C.

On 1 January 2012 Dobel Ltd Signed a Ten-Year Non-Cancellable