The inception of a lease is January 1,2014.A third party guarantees the residual value of the asset under the lease,estimated to be $12,000 at January 1,2019,the end of the lease term.Annual lease payments are $10,000 due each December 31,beginning December 31,2014.The last payment is due December 31,2018.Both the lessor and lessee use 10% as the interest rate.The remaining useful life of the asset was six years at the inception of the lease. What is the net asset balance for the lessor,and net liability balance for the lessee,at the date of the inception of the lease?
Net Asset (Lessor) Net Liability (lessee)

Question

Quizplus · Accepted Answer

To calculate the net asset balance for the lessor, we need to determine the present value of the lease payments plus the present value of the residual value that will be guaranteed by the third party.

PV of lease payments = $10,000 x ((1 - 1/1.1^5) / 0.1) = $35,367.63 
PV of guaranteed residual value = $12,000 / 1.1^5 = $6,955.71

Net asset balance = PV of lease payments + PV of guaranteed residual value = $35,367.63 + $6,955.71 = $42,323.34

To calculate the net liability balance for the lessee, we need to determine the present value of the lease payments minus the present value of the residual value that will be guaranteed by the third party.

PV of lease payments = $10,000 x ((1 - 1/1.1^5) / 0.1) = $35,367.63 
PV of guaranteed residual value = $12,000 / 1.1^5 = $6,955.71

Net liability balance = PV of lease payments - PV of guaranteed residual value = $35,367.63 - $6,955.71 = $28,411.92

Therefore, the correct answer is C.

The Inception of a Lease Is January 1,2014