Lonses (Part 1Robbins, Inc., leased a machine from Ready Leasing Co. Thelease requires 10 annual payments of P10,000 beginningimmediately. The lease specifies an interest rate of 12% and apurchase option of P10,000 at the end of the tenth year, eventhough the machine's estimated value on that date is P20,000.It is reasonably certain that Robbins will exercise the purchaseoption. Robbins' incremental borrowing rate is 14%. Whatamount should Robbins record the right-of-use asset at thebeginning of the lease term?a. 62,160(AICPA)b. 64,860c. 66,500d. 69,720

As in question implicit rate given which is also lower than incremental borrowing rate so we would…

Answered: option. Robbins' incremental borrowing…

option. Robbins' incremental borrowing rate is 14%. What amount should Robbins record the right-of-use asset at the beginning of the lease term?

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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Concept explainers

Leasing

Leasing is a contractual arrangement in which someone (a lessee) pays the owner (or lessor) of a building, land, vehicle, or other asset for the use of that asset. The lease is the agreement between lessee and lessor.

Question

Lonses (Part 1
Robbins, Inc., leased a machine from Ready Leasing Co. The
lease requires 10 annual payments of P10,000 beginning
immediately. The lease specifies an interest rate of 12% and a
purchase option of P10,000 at the end of the tenth year, even
though the machine's estimated value on that date is P20,000.
It is reasonably certain that Robbins will exercise the purchase
option. Robbins' incremental borrowing rate is 14%. What
amount should Robbins record the right-of-use asset at the
beginning of the lease term?
a. 62,160
(AICPA)
b. 64,860
c. 66,500
d. 69,720

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Step 1 Use of implicit rate instead of incremental borrowing rate:

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Step 2 Calculation of value to be recorded as right of value asset at beginning:

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Step 3 The correct option is (c) i.e 66500

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