Thornhill Equipment (lessor) leased a construction crane to Vanier Construction (lessee) on January 1, 2023. The following information relates to the leased asset and the lease agreement. (Click the icon to view the data.) Both companies use the straight-line depreciation method for cranes, and they both have December 31 year-end dates. Required Requirement a. Evaluate how the lessor (Thornhill Equipment) should account for the lease transaction. Start by determining the present value of the lease payments (PVLP). Then calculate the percentage of the PVLP compared to the fair value of the leased asset. (Use a financial calculator for all present value computations. Enter all currency values as positive amounts rounded to the nearest whole dollar. Round the percentage to the nearest whole percent.) PVLP Fair value of asset PVLP as % of fair value % Leased asset and lease agreement Cost of crane to lessor 100,000 Thornhill's normal selling price for crane Useful life $ 146,913 10 years 4,000 Estimated value at end of useful life Lease provisions Lease term Payment frequency Payment timing Annual payments, at end of year Estimated residual value at end of lease (unguaranteed) Ownership of crane reverts to lessor at end of lease term. Interest rate implicit in the lease (readily determinable by lessee) Lessee's incremental borrowing rate 7 years Annual December 31 $ 31,200 $ 10,000 12% 13%
Thornhill Equipment (lessor) leased a construction crane to Vanier Construction (lessee) on January 1, 2023. The following information relates to the leased asset and the lease agreement. (Click the icon to view the data.) Both companies use the straight-line depreciation method for cranes, and they both have December 31 year-end dates. Required Requirement a. Evaluate how the lessor (Thornhill Equipment) should account for the lease transaction. Start by determining the present value of the lease payments (PVLP). Then calculate the percentage of the PVLP compared to the fair value of the leased asset. (Use a financial calculator for all present value computations. Enter all currency values as positive amounts rounded to the nearest whole dollar. Round the percentage to the nearest whole percent.) PVLP Fair value of asset PVLP as % of fair value % Leased asset and lease agreement Cost of crane to lessor 100,000 Thornhill's normal selling price for crane Useful life $ 146,913 10 years 4,000 Estimated value at end of useful life Lease provisions Lease term Payment frequency Payment timing Annual payments, at end of year Estimated residual value at end of lease (unguaranteed) Ownership of crane reverts to lessor at end of lease term. Interest rate implicit in the lease (readily determinable by lessee) Lessee's incremental borrowing rate 7 years Annual December 31 $ 31,200 $ 10,000 12% 13%
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Thornhill Equipment (lessor) leased a construction crane to Vanier Construction (lessee) on January 1, 2023. The following information relates to the leased asset and the lease agreement.
(Click the icon to view the data.)
Both companies use the straight-line depreciation method for cranes, and they both have December 31 year-end dates.
Required
Requirement a. Evaluate how the lessor (Thornhill Equipment) should account for the lease transaction.
Start by determining the present value of the lease payments (PVLP). Then calculate the percentage of the PVLP compared to the fair value of the leased asset. (Use a financial calculator for all
present value computations. Enter all currency values as positive amounts rounded to the nearest whole dollar. Round the percentage to the nearest whole percent.)
PVLP
Fair value of asset
PVLP as % of fair value
%
Leased asset and lease agreement
-
Cost of crane to lessor
100,000
Thornhill's normal selling price for crane
$
146,913
Useful life
Estimated value at end of useful life
10 years
$
69
4,000
Lease provisions
Lease term
Payment frequency
Payment timing
Annual payments, at end of year
Estimated residual value at end of lease (unguaranteed)
Ownership of crane reverts to lessor at end of lease term.G
Interest rate implicit in the lease (readily determinable by lessee)
Lessee's incremental borrowing rate
7 years
Annual
December 31
6969
$
31,200
$
10,000
12%
13%
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