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Lessee Company enters into a 6-year finance lease of non-specialized equipment with Lessor Company on January 1. Lessee has agreed to pay $28,000 annually beginning immediately on January 1. The lessor estimates the residual value of the equipment to be $5,000 at lease end, and the lessee guarantees the residual value. The economic life of the asset is 7 years. The lessee's incremental borrowing rate is 7% and the lessor's implicit rate is not readily determinable by the lessee company. Compute the value of the lease liability for the lessee on January 1 under the following separate scenarios. a. The lessee estimates that the underlying asset will have a fair value of $5,000 at the end of the lease. b. The lessee estimates that the underlying asset will have a fair value of $2,000 at the end of the lease.

Lessee Company enters into a 6-year finance lease of non-specialized equipment with Lessor Company on January 1. Lessee has agreed to pay $28,000 annually beginning immediately on January 1. The lessor estimates the residual value of the equipment to be $5,000 at lease end, and the lessee guarantees the residual value. The economic life of the asset is 7 years. The lessee's incremental borrowing rate is 7% and the lessor's implicit rate is not readily determinable by the lessee company. Compute the value of the lease liability for the lessee on January 1 under the following separate scenarios. a. The lessee estimates that the underlying asset will have a fair value of $5,000 at the end of the lease. b. The lessee estimates that the underlying asset will have a fair value of $2,000 at the end of the lease.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Computing Lease Liability Lessee Company enters into a 6-year finance lease of non-specialized equipment with Lessor Company on January 1. Lessee has agreed to pay $28,000 annually beginning immediately on January 1. The lessor estimates the residual value of the equipment to be $5,000 at lease end, and the lessee guarantees the residual value. The economic life of the asset is 7 years. The lessee's incremental borrowing rate is 7% and the lessor's implicit rate is not readily determinable by the lessee company. Compute the value of the lease liability for the lessee on January 1 under the following separate scenarios. a. The lessee estimates that the underlying asset will have a fair value of $5,000 at the end of the lease. b. The lessee estimates that the underlying asset will have a fair value of $2,000 at the end of the lease. Note: Round your answers to the nearest whole dollar. a. Lease liability $ 146,167 * b. Lease liability $ 0 x
Transcribed Image Text:Computing Lease Liability Lessee Company enters into a 6-year finance lease of non-specialized equipment with Lessor Company on January 1. Lessee has agreed to pay $28,000 annually beginning immediately on January 1. The lessor estimates the residual value of the equipment to be $5,000 at lease end, and the lessee guarantees the residual value. The economic life of the asset is 7 years. The lessee's incremental borrowing rate is 7% and the lessor's implicit rate is not readily determinable by the lessee company. Compute the value of the lease liability for the lessee on January 1 under the following separate scenarios. a. The lessee estimates that the underlying asset will have a fair value of $5,000 at the end of the lease. b. The lessee estimates that the underlying asset will have a fair value of $2,000 at the end of the lease. Note: Round your answers to the nearest whole dollar. a. Lease liability $ 146,167 * b. Lease liability $ 0 x
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