TradeWell Company signs a lease agreement for 6 years. The agreement requires an annual payment of $35,750 at the end of each year. The implicit interest rate in the lease is 12%. The estimated residual value of the asset is $42,500. Mu Bank, an unrelated third party, guarantees the residual value. What amount should TradeWell Company debit to Lease Receivable at the inception of the lease?

Question

Quizplus · Accepted Answer

The amount TradeWell Company should debit to Lease Receivable at the inception of the lease is calculated by adding the present value of the annual lease payments to the present value of the guaranteed residual value. The present value of the annual lease payments is calculated using the formula for the present value of an annuity due to the payments being made at the end of each year. The present value of the guaranteed residual value is calculated by discounting the residual value at the implicit interest rate over the lease term. The correct calculation includes both these present values, leading to the correct answer.

TradeWell Company Signs a Lease Agreement for 6 Years