Suppose Blue expects the residual value at the end of the lease term to be $50,000 but still guarantees a residual of $60,000. Compute the value of the lease liability at lease commencement. Lease liability $

FINANCIAL ACCOUNTING
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Chapter1: Financial Statements And Business Decisions
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Blossom Leasing Company agrees to lease equipment to Blue Corporation on January 1, 2020. The following information relates to the lease agreement.

1.   The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.
2.   The cost of the machinery is $520,000, and the fair value of the asset on January 1, 2020, is $737,000.
3.   At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $60,000. Blue estimates that the expected residual value at the end of the lease term will be 60,000. Blue amortizes all of its leased equipment on a straight-line basis.
4.   The lease agreement requires equal annual rental payments, beginning on January 1, 2020.
5.   The collectibility of the lease payments is probable.
6.   Blossom desires a 10% rate of return on its investments. Blue’s incremental borrowing rate is 11%, and the lessor’s implicit rate is unknown.


(Assume the accounting period ends on December 31.)

Suppose Blue expects the residual value at the end of the lease term to be $50,000 but still guarantees a residual of $60,000.
Compute the value of the lease liability at lease commencement.
Lease liability
%24
Transcribed Image Text:Suppose Blue expects the residual value at the end of the lease term to be $50,000 but still guarantees a residual of $60,000. Compute the value of the lease liability at lease commencement. Lease liability %24
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