On 1 July 2019, Cars Limited signed a 7-year non-cancelable lease for equipment that requires equal rental payment of $3,500,000 at the beginning of each year. The equipment has a fair value at the inception of the lease of $15,000,000, an estimated useful life of 10 years and no residual value. The lease does not transfer title or contain a bargain-purchase option. The Cars Limited’s incremental borrowing rate is 15% and PVIFA (n=7, i=15%) is 4.1604. RequiredIndicate and explain the type of lease Cars Limited signed in 2019. Include a separate analysis for the scenarios where Cars Limited is the lessee and lessor.
On 1 July 2019, Cars Limited signed a 7-year non-cancelable lease for equipment that requires equal rental payment of $3,500,000 at the beginning of each year. The equipment has a fair value at the inception of the lease of $15,000,000, an estimated useful life of 10 years and no residual value. The lease does not transfer title or contain a bargain-purchase option. The Cars Limited’s incremental borrowing rate is 15% and PVIFA (n=7, i=15%) is 4.1604. RequiredIndicate and explain the type of lease Cars Limited signed in 2019. Include a separate analysis for the scenarios where Cars Limited is the lessee and lessor.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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On 1 July 2019, Cars Limited signed a 7-year non-cancelable lease for equipment that requires equal rental payment of $3,500,000 at the beginning of each year. The equipment has a fair value at the inception of the lease of $15,000,000, an estimated useful life of 10 years and no residual value. The lease does not transfer title or contain a bargain-purchase option. The Cars Limited’s incremental borrowing rate is 15% and PVIFA (n=7, i=15%) is 4.1604.
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Indicate and explain the type of lease Cars Limited signed in 2019. Include a separate analysis for the scenarios where Cars Limited is the lessee and lessor.
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