Question

30. Oriole, Inc. leased equipment from Tower Company under a 4-year lease requiring equal annual payments of $254,152, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4 year useful life and no salvage value. Oriole, Inc.’s incremental borrowing rate is 11% and the rate implicit in the lease (which is known by Oriole, Inc.) is 9%. Assuming that this lease is properly classified as a finance lease, what is the amount of Lease Liability reduction recorded in first year after the lease inception?

Answer 1

Answer:

$897,484.

Explanation:

Given:

Annual Payment = $254,152

The following company's average loan rate seems to be 11 per cent as well as the implied cost of the contract recognized by the company is 9 per cent.

Thus, the price implied in the contract that is recognized to the company would be 9 per cent although the contract doesn't often shift possession unless there is a negotiating opportunity to buy.

Let the lease year to Y = 4, and I = 9%

So, current value of the annuity is Y=4, I = 9% i.e., 3.53129

So, the cost documented for the contracted asset at the beginning of the contract  $=254,152\times3.53129=897,484$

Amount documented at the beginning of the contract for such contracted asset = $897,484