On 1 January 2012 Dobel Ltd signed a ten-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 ten-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 minimum lease payments Dobel Ltd should use the implicit rate of 10% because it is lower than their incremental borrowing rate of 12%. The present value of minimum lease payments is calculated as follows:
PVMLP = $100,000 x [(1 - (1 / (1 + 0.10)^10)) / 0.10] = $614,460
Therefore, the leased property should be recorded in the books of Dobel Ltd at the present value of minimum lease payments, which is $614,460.

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