On January 1, Ramirez Supply leased a car for a four-year period, at which time possession of the car will revert back to the lessor. Annual lease payments are $20,000 due on December 31 of each year, calculated by the lessor using a 5% discount rate. Negotiations led to Ramirez guaranteeing the lessor a $72,000 residual value at the end of the lease term although Ramirez estimates that the residual value after four years will be $70,000. What is the amount to be added to the right-of-use asset and lease payable under the residual value guarantee? (Round your answer to the nearest whole dollar amount.) The present value of $1: n = 4, i = 5% is 0.82270.
The present value of an ordinary annuity of $1: n = 4, i = 5% is 3.54595.
The present value of an annuity due of $1: n = 4, i = 5% is 3.72325.

Question

Quizplus · Accepted Answer

If a cash payment under a lessee-guaranteed residual value is predicted, the present value of that payment is added to the present value of the lease payments the lessee records as both a right-of-use asset and a lease liability. Likewise, it also adds to the amount that the lessor records as a lease receivable. Ramirez guarantees a cash payment of $2,000 to make up the difference of the $72,000 total guarantee to the lessor and the guaranteed residual value estimate of $70,000 for the asset to be returned to the lessor.
Amount to be added to the right-of-use asset and lease liability:
($72,000 - 70,000 = $2,000) × 0.82270** = $1,645
** Present value of $1: n = 4, i = 5%

On January 1, Ramirez Supply Leased a Car for a Four-Year