LOR Leased to LEE a Computer That Cost LOR $20,000

question 107

Essay

LOR leased to LEE a computer that cost LOR $20,000.The explicit interest rate is 20%; rentals are
paid at each year-end; and the lease term is three years.Residual value at the end of the lease term is
$2,000.Assume a direct financing lease.

Requirement 1:
LEE retains the computer at the end of the lease term at a BPO cost of $1,500.
(a)The rental amount computed by LOR is $ _.
(b)The amount LEE should capitalize is $ _.

Requirement 2:
How much interest should be recognized at the end of year 1, in the above situation, by: (a)LOR?
$________ (b)LEE? $________

Requirement 3:
At the end of year 1, in the above situation, how much would the principal be reduced for (a)LOR's lease receivable?
$ and (b)LEE's lease liability?
$________.

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Definitions:

Prompt Payment Discount

A discount offered to customers by suppliers as an incentive for early payment of their invoices within a specified period.

Foregone

Something missed or given up, often used in the context of opportunities or profits that were not realized.

Prime Rate

The interest rate that commercial banks charge their most credit-worthy customers, often used as a reference rate for various loans.

Revolving Credit

A credit facility that allows a company or individual to borrow up to a pre-approved limit, pay it back, and borrow again.