Lessee, Inc

question 29

Essay

Lessee, Inc., acquired the use of a machine by agreeing to pay the manufacturer of the machine $20,000 per year for 5 years.At the time the lease was signed, the interest rate for a 5-year loan was 8%.
Required:
(a.)Use the appropriate factor from Table 6-5 to calculate the amount that Lessee, Inc.could have paid at the beginning of the lease to buy the machine outright.
(b.)What causes the difference between the amount you calculated in part (a.)and the total of $100,000 ($20,000 per year for 5 years)that Lessee, Inc.will pay under the terms of the lease?
(c.)What is the appropriate amount of cost to be reported in Lessee, Inc's balance sheet (at the time the lease was signed)with respect to this asset?

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Definitions:

Good Faith Purchaser

An individual who buys property without knowledge of any previous claims, fraud, or problems associated with it, thus protected by law.

Computer Sales & Repair (CSR)

Businesses focused on selling computer hardware and software, as well as providing repair and maintenance services for computer systems.

Risk Of Loss

The potential that an asset or investment will decrease in value or become entirely worthless.

Passage Of Title

The transfer of ownership rights from the seller to the buyer in a transaction.