Kingslake Ltd signed a non-cancellable lease contract on 1 January 2012 for a machine that requires 5 annual payments of $200 000 at the start of each year.On the last annual payment,ownership will transfer from the lessor to Kingslake Ltd.The fair value of the asset if paid in cash is $75964.The following information is also available: $$\begin{array} { | c | r | r | r | }
\hline \text { Period } & \text { Present value of an annuity of } \$ 1 \
\hline & 10 \% & 12 & 16 \
\hline 1 & 0.9091 & 0.8929 & 0.8621 \
\hline 2 & 1.7355 & 1.6091 & 1.6052 \
\hline 3 & 2.4869 & 2.4018 & 2.2459 \
\hline 4 & 3.1699 & 3.0373 & 2.7982 \
\hline 5 & 3.7908 & 3.6548 & 3.2743 \
\hline
\end{array}$$ What is the implicit rate of this lease arrangement in accordance with IAS 17?

Question

Kingslake Ltd signed a non-cancellable lease contract on 1 January 2012 for a machine that requires 5 annual payments of $200 000 at the start of each year.On the last annual payment,ownership will transfer from the lessor to Kingslake Ltd.The fair value of the asset if paid in cash is $75964.The following information is also available: $$\begin{array} { | c | r | r | r | } 
\hline \text { Period } & \text { Present value of an annuity of } \$ 1 \
\hline & 10 \% & 12 & 16 \
\hline 1 & 0.9091 & 0.8929 & 0.8621 \
\hline 2 & 1.7355 & 1.6091 & 1.6052 \
\hline 3 & 2.4869 & 2.4018 & 2.2459 \
\hline 4 & 3.1699 & 3.0373 & 2.7982 \
\hline 5 & 3.7908 & 3.6548 & 3.2743 \
\hline
\end{array}$$ What is the implicit rate of this lease arrangement in accordance with IAS 17?

Quizplus · Accepted Answer

The present value of the lease payments at 16% is closest to the fair value of the asset ($75964), indicating that 16% is the implicit rate.

Kingslake Ltd Signed a Non-Cancellable Lease Contract on 1 January