Burt Ltd enters into a non-cancellable 8-year lease agreement with Earnie Ltd on 1 July 2023. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $1,814,536. The machinery is expected to have an economic life of 9 years, after which time it will have an expected residual value of $250,000. There is a bargain purchase option that Burt Ltd will be able to exercise at the end of the 8th year for $280,000. There are to be 8 annual payments of $400,000, the first being made on 30 June 2024. Included within the $400,000 lease payments is an amount of $30,000 representing payment to the lessor for the insurance and maintenance of the equipment. The equipment is to be depreciated on a straight-line basis. REQUIRED Determine the rate of interest implicit in the lease and calculate the present value of lease payments.
Burt Ltd enters into a non-cancellable 8-year lease agreement with Earnie Ltd on 1 July 2023. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $1,814,536. The machinery is expected to have an economic life of 9 years, after which time it will have an expected residual value of $250,000. There is a bargain purchase option that Burt Ltd will be able to exercise at the end of the 8th year for $280,000. There are to be 8 annual payments of $400,000, the first being made on 30 June 2024. Included within the $400,000 lease payments is an amount of $30,000 representing payment to the lessor for the insurance and maintenance of the equipment. The equipment is to be depreciated on a straight-line basis. REQUIRED Determine the rate of interest implicit in the lease and calculate the present value of lease payments.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Burt Ltd enters into a non-cancellable 8-year lease agreement with Earnie Ltd on 1 July 2023. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $1,814,536.
The machinery is expected to have an economic life of 9 years, after which time it will have an expected residual value of $250,000. There is a bargain purchase option that Burt Ltd will be able to exercise at the end of the 8th year for $280,000.
There are to be 8 annual payments of $400,000, the first being made on 30 June 2024. Included within the $400,000 lease payments is an amount of $30,000 representing payment to the lessor for the insurance and maintenance of the equipment. The equipment is to be
REQUIRED
- Determine the rate of interest implicit in the lease and calculate the present value of lease payments.
Transcribed Image Text:In this question the implicit rate is (percent):
Enter interest rate
Proof (Enter the proof in the table below)
Description
Calculation
Total
Periodic lease payments
Enter calculation formula
Enter formula
Bargain purchase option
Enter calculation formula
Enter formula
Fair value at lease inception
Enter grand t
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