Question

Plessings Company leased a piece of machinery to Banana, Inc. on January 1, 2019. The lease is correctly classified as a sales−type lease. Plessings will receive three annual lease payments of $20,700, with the first one received on January 1, 2019. There is no guaranteed or unguaranteed residual value. The fair value of the machine is $50,000 and Plessings incurs initial direct costs of $5,000. What is the implicit rate assuming the initial direct costs are deferred?

Answer 1

Answer:

7.49%

Explanation:

n = Number of payment periods = 3

P = Total lease payment = Annual lease payment * Number of period = $20,700 * 3 = $62,100

FV = fair value of the machine = $50,000

Implicit rate = [($62,100 / $50,000)^(1 / 3)] - 1 = 0.0749, or 7.49%