The Following Are Some of the Characteristics of an Asset

question 89

Essay

The following are some of the characteristics of an asset available for lease:
$$\begin{array} { | l | l | } \hline \text { Fair value of leased asset } & 120,000 \\\hline \text { Useful life } & 10 \text { years } \\\hline \text { Lease term } & 7 \text { years } \\\hline \text { Payment frequency } & \text { Annual } \\\hline \text { Payment timing } & \text { Beginning of year } \\\hline \text { Unguaranteed residual value } & 10,000 \\\hline \text { Interest rate implicit in lease (not known to lessee) } & 15 \% \\\hline \text { Lessee's incremental borrowing rate } & 14 \% \\\hline\end{array}$$ 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 capital lease using the quantitative guidelines in ASPE.

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Definitions:

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