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:
At what amount should the leased property be recorded in the books of Dobel Ltd?

Question

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:
 At what amount should the leased property be recorded in the books of Dobel Ltd?

Quizplus · Accepted Answer

To calculate the present value of lease payments, we need to use the implicit rate of 10%. 
PV of lease payments = $100,000 x [1-1/(1+10%)^10] / 10% = $614,460 
Since the ownership of the leased asset remains with the lessor, Dobel Ltd should not record the leased asset on its books. Hence, the correct answer is C.

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