Glaus Leasing Company agrees to lease equipment to Jensen
Corporation on January 1, 2020. The following information relates
to the lease agreement.
|1.||The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.|
|2.||The cost of the machinery is $525,000, and the fair value of the asset on January 1, 2020, is $700,000.|
|3.||At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $50,000. Jensen estimates that the expected residual value at the end of the lease term will be 50,000. Jensen amortizes all of its leased equipment on a straight-line basis.|
|4.||The lease agreement requires equal annual rental payments, beginning on January 1, 2020.|
|5.||The collectibility of the lease payments is probable.|
6. Glaus desires a 5% rate of return on its investments. Jensen’s incremental borrowing rate is 6%, and the lessor’s implicit rate is unknown.
Suppose Jensen expects the residual value at the end of the
lease term to be $40,000 but still guarantees a residual of
$50,000. Compute the value of the lease liability at lease
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Solution: a)The lease term = 7 years estimated economic life = 9 years So,now the capital lese = 7 / 9 = 0.78 = 78 % Based on this,there is no uncertainity regarding collectibility of lease amounts paid and cost to be reduced by the lessor. Therefore,the fair value = $ 700,000 It exceeds the lessors cost = $ 525,000 So, this lease is sale type of lease. b)Here we need to compute the annual rental payments : Annual rental payments =( $ 700,000 - ($ 50,000 * 0.711)) / 5.7864 = (700,000 - 35,550 )/5.7864 = $664,450 / 5.7864 = $ 114,829.60 Annual rental payments = $114,829.60 We get the the above values from annuity table and pv table @ 5 % for 7 years period. c)Here calculate the present value of minimum lease payments : Present value of annual payments = $ 114,829.60 * 5.5824 = $ 641,024.759 Present value of annual payments = $ 641,025 Present value of guaranteed residual value = $ 50,000 * 0.59190 = $ 29,595 Present value of guaranteed residual value = $ 29,595 We get the the above values from annuity table and pv table @ 6 % of 9 years period. Note : As per rules we answered only 3 questions,that's the reason i did not answered remaning questions.So if you want the answers for remaining questions please upload it as another question.Thank you. ...