Question

On January 1, Garcia Supply leased a truck for a three-year period, at which time possession of the truck will revert back to the lessor. Annual lease payments are $13,500 due on December 31 of each year, calculated by the lessor using a 4% discount rate. Negotiations led to Garcia guaranteeing a $35,800 residual value at the end of the lease term. Garcia estimates that the residual value after four years will be $34,100. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) What is the amount to be added to the right-of-use asset and lease liability under the residual value guarantee?

Answer 1

Solution:

Step 1: Calculate present value of the lease payments

i=4%

n=63

amount= 13,500

$13,500 x 5.32948= $ 71,947

Initial balance, January 1 (calculated above) $71,947

Reduction for first payment, January 1 (13,500 )

December 31, net liability $113,731

Step 2:

dr Interest expense (4% x [$71,947- 13,500 ]) 66,547

cr Interest payable 66,547