Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease includes a guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessor's implicit lease rate, known to the lessee, is 10%.
Present value interest factors are:
$$\begin{array} { l c c }
& \underline { \mathbf { 1 0 \% } } & \underline { \mathbf { 1 2 \% } } \
\text { PVIF \$1 } 10 \text { periods } & 0.38554 & 0.32197 \
\text { PVIF Annuity } 10 \text { periods } & 6.14457 & 5.65022
\end{array}$$
-Upon acquisition,the leased equipment will be valued on Pepper's balance sheet at (Round all calculations to the nearest whole dollar amount.)

Question

Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease includes a guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessor's implicit lease rate, known to the lessee, is 10%.
Present value interest factors are:
$$\begin{array} { l c c } 
& \underline { \mathbf { 1 0 \% } } & \underline { \mathbf { 1 2 \% } } \
\text { PVIF \$1 } 10 \text { periods } & 0.38554 & 0.32197 \
\text { PVIF Annuity } 10 \text { periods } & 6.14457 & 5.65022
\end{array}$$
-Upon acquisition,the leased equipment will be valued on Pepper's balance sheet at (Round all calculations to the nearest whole dollar amount.)

Quizplus · Accepted Answer

The value of the leased equipment on Pepper's balance sheet will include the present value of the lease payments and the present value of the guaranteed residual value. The lease payments are $25,000 per year for 10 years, and the guaranteed residual value is $10,000. Using the lessee's discount rate of 12% (since the lease is being valued from the lessee's perspective and the question specifies that Pepper can finance the lease at a 12% rate), we calculate the present value of the lease payments and the residual value as follows:- Present value of lease payments = $25,000 * PVIF Annuity 10 periods at 12% = $25,000 * 5.65022 = $141,255.5- Present value of guaranteed residual value = $10,000 * PVIF $1 10 periods at 12% = $10,000 * 0.32197 = $3,219.7Adding these two amounts gives the value of the leased equipment on Pepper's balance sheet:- $141,255.5 + $3,219.7 = $144,475.2Rounded to the nearest whole dollar, the value is $144,475, which corresponds to option A. However, the correct calculation based on the provided information and the correct interpretation of the question should lead to option B as the intended correct answer, suggesting a possible mistake in the calculation or interpretation provided in the question or answer choices. Given the calculations presented, the correct answer according to the provided calculation is A, but based on the question's structure and typical accounting practices, there seems to be a misunderstanding or error in the question setup or answer choices.

Pepper, Inc -Upon Acquisition,the Leased Equipment Will Be Valued on Pepper's Balance