Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Transcribed Image Text:On January 1, 2020, ABC Company leased two automobiles for executive use. The lease requires
ABC to make five annual payments of P260,000 beginning January 1, 2020. At the end of the lease
term, December 31, 2024, ABC guarantees that the residual value of the automobiles will total
P200,000. The property reverts to the lessor at the end of the lease term. The estimated useful life of
the automobiles is six years and ABC uses straight-line method for all its assets.
The firm's incremental borrowing rate is 10%. The interest rate implicit in the lease, which is known to
ABC Company, is 9%. Based on these rates, the following present value factors are determined as
follows:
Present value of 1 for five periods
Present value of an ordinary annuity of 1 for four periods
10%
0.6209
3.1699
9%
0.6499
3.2397
Required: Capitalized cost of right-of-use asset on January 1, 2020.
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At what amount should the lease liability be recognized at January 1, 2020, after making the first payment of P260,000 to the lessor?
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