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:

Least Squares

A mathematical approach used in regression analysis to determine the best-fit line through data points by minimizing the sum of the squares of the vertical differences between observed and predicted values.

Linear Trend Line

A straight line that best fits the data on a graph, showing the general direction that a set of data is moving towards.

Seasonal Indexes

Factors used to adjust data for regular seasonal variations to better compare data across different times of the year.

Seasonalized Forecast

A prediction model that accounts for fluctuations or patterns that repeat over a specific period, such as seasons, adjusting for their impact on the data.