Leicester Ltd leases equipment to Wentworth Company that was carried at a cost of £200,000 and also has a fair value at the inception of the lease of £200,000.All executory costs are paid by Wentworth directly to third parties.The equipment has a useful life of 6 years with no residual value.The lease has an implicit interest rate of 8%, no bargain purchase option, and no transfer of title.The term of the lease is 6 years beginning January 1, 2016.Based on this information, what are the equal rental payments due at the beginning of each year (to the nearest pound)?

Question

Quizplus · Accepted Answer

The lease is a capital lease, and the rental payments are calculated using the present value of an annuity due formula. The present value of the lease payments should equal the fair value of the equipment (£200,000). Using the implicit interest rate of 8% and a lease term of 6 years, the rental payment is calculated as £40,058.

Leicester Ltd Leases Equipment to Wentworth Company That Was Carried