Elliott Brothers enters into a lease agreement with Central Leasing for a piece of equipment. The terms of the 5-year lease state that payments of $22,500 will be made annually on January 1, commencing with the date that the lease begins. The lease contains a provision that Elliott Brothers may purchase the equipment at the end of the lease period for $16,000, which is well below the expected fair value at the end of the lease. As such, it is expected that Elliott Brothers will exercise this option. The implicit rate in the lease is 10%. If this lease is treated as a finance lease for Elliott Brothers, at what value will the right-of-use asset be recorded?

Question

Quizplus · Accepted Answer

The right-of-use asset is recorded at the present value of the lease payments plus the residual value. The present value of the lease payments is $93,822, and the residual value is $16,000. Therefore, the right-of-use asset is recorded at $109,822.

Elliott Brothers Enters into a Lease Agreement with Central Leasing