On 1 January 2012 Dobel Ltd signed a 10-year non-cancellable lease that requires a payment of $100 000 at the end of each year.Ownership of the leased asset remains with the lessor at expiry of the lease.The incremental borrowing rate of Dobel Ltd is 12% while the implicit rate of the lessor known to Dobel Ltd is 10%. The following information is also available: $\begin{array}{|r|r|r|}
\hline \text { Period } & \text { Present value of an annuity of } \$ 1 \
\hline & 10 \% & 12 \
\hline 10 & 6.1446 & 5.6502 \
\hline
\end{array}$ At what amount should the leased property be recorded in the books of Dobel Ltd?

Question

Quizplus · Accepted Answer

The leased property should be recorded at the present value of the lease payments using the lower of the lessee's incremental borrowing rate or the lessor's implicit rate. Here, the implicit rate of 10% is lower. The present value of an annuity of $1 at 10% for 10 years is 6.1446. Therefore, the leased property should be recorded at $100,000 * 6.1446 = $614,460.

On 1 January 2012 Dobel Ltd Signed a 10-Year Non-Cancellable