The Following Are Some of the Characteristics of an Asset

question 52

Essay

The following are some of the characteristics of an asset available for lease:
$$\begin{array} { | l | l | } \hline \text { Fair value of leased asset } & 50,000 \\\hline \text { Lease term } & 3 \text { years } \\\hline \text { Payment frequency } & \text { Annual } \\\hline \text { Payment timing } & \text { Beginning of year } \\\hline \text { Guaranteed residual value } & 15,000 \\\hline \text { Interest rate implicit in lease (not known to lessee) } & 9 \% \\\hline \text { Lessee's incremental borrowing rate } & 3 \% \\\hline\end{array}$$ Requirements:
a.Determine the amount of lease payment that the lessor would require to lease the asset.
b.Compute the present value of minimum lease payments for the lessee.
c.Compute the present value of minimum lease payments for the lessor.
d.Evaluate whether the lessee should classify the lease as operating or finance.

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Definitions:

Sales Tax

A tax on sales or on the receipts from sales, usually added to the consumer's purchase price and collected by the retailer.

Service Charge

A fee collected for services provided, often added to transactions in finance, hospitality, or banking.

Condensed Income Statements

Simplified financial statements that summarize the revenue, costs, and expenses incurred during a specified period, showing the net income or loss.

Merchandising Companies

Businesses that purchase goods in a finished state and sell them as is, making profits from the sales margin.