Blossom Leasing Company agrees to lease equipment to Blue 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 $520,000, and the fair value of the asset on January 1, 2020, is $737,000.3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $60,000. Blue estimates that the expected residual value at the end of the lease term will be 60,000. Blue 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. Blossom desires a 10% rate of return on its investments. Blue’s incremental borrowing rate is 11%, and the lessor’s implicit rate is unknown.(Assume the accounting period ends on December 31.) Suppose Blue 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%24

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

Answered: Suppose Blue expects the residual value…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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Blossom Leasing Company agrees to lease equipment to Blue 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 $520,000, and the fair value of the asset on January 1, 2020, is $737,000.
3.		At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $60,000. Blue estimates that the expected residual value at the end of the lease term will be 60,000. Blue 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.		Blossom desires a 10% rate of return on its investments. Blue’s incremental borrowing rate is 11%, and the lessor’s implicit rate is unknown.

(Assume the accounting period ends on December 31.)

Suppose Blue 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
%24

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