Present value of annual lease payment = $148,471
Right-of-use asset = $166,471
Given:
Time for lease = 8 year
Annual payment = $25,300 at the beginning of each year
Cost of machine = $170,000
Rate of return = 8% (Annual)
Expected life of machine = 10 year
Incremental borrowing rate = 10%
Dexter incurs initial direct costs = $18,000
Computation:
Using excel formula for Present value of annual lease;
Present value of annual lease payment = Annual payment[PVAD(r,n)
Present value of annual lease payment = 25,300[PVAD (10%, 8 years)]
Present value of annual lease payment = $148,471
Right-of-use asset = Present value of annual lease payment + Dexter incurs initial direct costs
Right-of-use asset = $148,471 + $18,000
Right-of-use asset = $166,471
<em> Books of (Dexter)</em>
<em><u>Date Particular Debit Credit</u></em>
1/1/17 Right-of-use assets 166,471
Cash 18,000
Lease liability 148,471
1/1/17 Lease liability 25,300
Cash 25,300
31/12/17 Interest (148,471-25,300)x0.1 12,317
Interest Receivable 12,317
12/31/17 Depreciation (166,471/8) 20,809
Accumulated depreciation 20,809
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