Bravo Co. on January 1, 2021, enters into a nine-year non-cancelable lease for equipment having an estimated useful life of 10 years and a fair value to the lessor, Stacey Corp., at the inception of the lease of $4,000,000. Bravo Co's incremental borrowing rate is 8%. Bravo Co. uses the
Bravo Co. on January 1, 2021, enters into a nine-year non-cancelable lease for equipment having an estimated useful life of 10 years and a fair value to the lessor, Stacey Corp., at the inception of the lease of $4,000,000. Bravo Co's incremental borrowing rate is 8%. Bravo Co. uses the straight-line method to
- Rental payments of $266,000 are payable at the beginning of each six-month period.
- An option allowing the lessor to extend the lease one year beyond the lease term.
- A guarantee by Bravo Co that Stacey Corp. will realize $200,000 from selling the asset at the expiration of the lease. However, the actual residual value is expected to be $120,000.
Instructions
(a) What kind of lease is this to Bravo Co?
(b) What should be considered the lease term?
(c) What is the present value of the lease payments (1) for classification of the lease and (2) for measurement of the lease liability? (PV factor for annuity due of 20 semi-annual payments at 8% annual rate, 14.13394; PV factor for amount due in 20 semi-annual interest periods at 8% annual rate, .45639.) (Round to nearest dollar.)
(d) What
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