Larkspur Leasing Company agrees to lease equipment to Cullumber 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 $485,000, and the fair value of the asset on January 1, 2020, is $687,000.3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $60,000. Cullumber estimates that the expected residual value at the end of the lease term will be 60,000. Cullumber 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. Larkspur desires a 10% rate of return on its investments. Cullumber’s incremental borrowing rate is 11%, and the lessor’s implicit rate is unknown.(Assume the accounting period ends on December 31.)Suppose Cullumber 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 $

Lease refers to a contract between two parties under which one party who is the real owner of an…

Answered: Compute the value of the lease…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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Larkspur Leasing Company agrees to lease equipment to Cullumber 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 $485,000, and the fair value of the asset on January 1, 2020, is $687,000.
3.		At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $60,000. Cullumber estimates that the expected residual value at the end of the lease term will be 60,000. Cullumber 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.		Larkspur desires a 10% rate of return on its investments. Cullumber’s incremental borrowing rate is 11%, and the lessor’s implicit rate is unknown.

(Assume the accounting period ends on December 31.)

Suppose Cullumber 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

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