Larkspur Leasing Company agrees to lease equipment to Cullumber Corporation on January 1, 2025. The following information relates to the lease agreement. 1. 2. 3. 4. 5. 6. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. The cost of the machinery is $559,000, and the fair value of the asset on January 1, 2025, is $724,000. 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. The lease agreement requires equal annual rental payments, beginning on January 1, 2025. The collectibility of the lease payments is probable. 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.) Click here to view factor tables.
Larkspur Leasing Company agrees to lease equipment to Cullumber Corporation on January 1, 2025. The following information relates to the lease agreement. 1. 2. 3. 4. 5. 6. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. The cost of the machinery is $559,000, and the fair value of the asset on January 1, 2025, is $724,000. 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. The lease agreement requires equal annual rental payments, beginning on January 1, 2025. The collectibility of the lease payments is probable. 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.) Click here to view factor tables.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Dd3.
Transcribed Image Text:Larkspur Leasing Company agrees to lease equipment to Cullumber Corporation on January 1, 2025. The following information
relates to the lease agreement.
1.
2.
3.
4.
5.
6.
The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.
The cost of the machinery is $559,000, and the fair value of the asset on January 1, 2025, is $724,000.
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.
The lease agreement requires equal annual rental payments, beginning on January 1, 2025.
The collectibility of the lease payments is probable.
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.)
Click here to view factor tables.
Transcribed Image Text:(f)
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. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the
final answer to O decimal places e.g. 58,972.)
Lease liability $
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