Question

ClevelandInc. leased a new crane to Abriendo Construction under a 5-year, non-cancelable contract starting January 1, 2020. Terms of the lease require payments of $48,555 each January 1, starting January 1, 2020. The crane has an estimated life of 7 years, a fair value of $240,000, and a cost to Cleveland of $240,000. The estimated fair value of the crane is expected to be $45,000 (unguaranteed) at the end of the lease term. No bargain purchase or renewal options are included in the contract, and it is not a specialized asset. Both Cleveland and Abriendo adjust and close books annually at December 31. Collectibility of the lease payments is probable. Abriendo’s incremental borrowing rate is 8%, and Cleveland’s implicit interest rate of 8% is known to Abriendo. Discuss what should be presented in the balance sheet, the income statement, and the related notes of both the lessee and the lessor at December 31, 2020.

Answer 1

Answer:

The correct answer is "2,40,000". The further explanation is given below.

Explanation:

The given fair value is:

= $240,000

The presentation in books of lessee will be:

⇒  $Record \ of \ assets =PV \ of \ Lease \ Payment +Unguaranteed \ residual \ value$

⇒  $Annuity \ value \ of \ 8 \ percent \5 \ year\times 48555+Anuity \ value \ of \ 5th \ year\times 45000$

On putting the values, we get

⇒  $3.9927\times 48555+0.6806\times 45000$

⇒  $193865.54+30627$

⇒  $224492.54 \ i.e., 2,24,493$ ($)

Presentation in books of Lessor , the fair value of assets will be

=  $2,40,000$ ($)