Plessings Company leased a piece of machinery to Banana, Inc. on January 1, 2019. The lease is correctly classified as a sales-type lease. Plessings will receive three annual lease payments of $20,100, with the first one received on January 1, 2019. There is no guaranteed or unguaranteed residual value. The fair value of the machine is $50,000 and Plessings incurs initial direct costs of $5,000. What is the implicit rate assuming the initial direct costs are expensed?

Question

Quizplus · Accepted Answer

The implicit rate is the rate that equates the present value of the lease payments to the fair value of the machine plus the initial direct costs. The present value of the lease payments is $50,000, and the fair value of the machine plus the initial direct costs is $55,000. Therefore, the implicit rate is 9.98%.

Plessings Company Leased a Piece of Machinery to Banana, Inc