Low Falls Corporation (lessor) entered into a lease agreement on January 1, 2017, to provide Amazon Fleet Company (lessee) with a piece of machinery. The terms of the lease agreement were as follows.The lease is to be for 3 years with rental payments of $12,400 to be made at the beginning of each year.The machinery has a fair value of $70,010, a book value of $50,000, and an economic life of 7 years.At the end of the lease term, both parties expect the machinery to have a residual value of $40,000, $20,000 of which is guaranteed ($20,000 unguaranteed).The lease does not transfer ownership at the end of the lease term, does not have a bargain purchase option, and the asset is not of a specialized nature.The implicit rate used by Low Falls is 5%, which is known by Amazon Fleet, and collectability of the payments is probable. Amazon Fleet’s incremental borrowing rate is 6%.Assume the lessor depreciates the asset on a cost basis (not fair value). Q: When testing the lease for classification purposes, what is the PV of the asset that the LESSOR, Low Falls, should use to compare with underlying asset’s fair value?Group of answer choices$40,000$35,457$30,010$52,733$48,000

Present value denotes the present worth of money by discounting the future cash flows whereas future…

Answered: Low Falls Corporation (lessor) entered…

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter20: Accounting For Leases

Section: Chapter Questions

Problem 2E: Lessee Accounting with Payments Made at Beginning of Year Adden Company signs a lease agreement...

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Low Falls Corporation (lessor) entered into a lease agreement on January 1, 2017, to provide Amazon Fleet Company (lessee) with a piece of machinery. The terms of the lease agreement were as follows.

The lease is to be for 3 years with rental payments of $12,400 to be made at the beginning of each year.
The machinery has a fair value of $70,010, a book value of $50,000, and an economic life of 7 years.
At the end of the lease term, both parties expect the machinery to have a residual value of $40,000, $20,000 of which is guaranteed ($20,000 unguaranteed).
The lease does not transfer ownership at the end of the lease term, does not have a bargain purchase option, and the asset is not of a specialized nature.
The implicit rate used by Low Falls is 5%, which is known by Amazon Fleet, and collectability of the payments is probable. Amazon Fleet’s incremental borrowing rate is 6%.
Assume the lessor depreciates the asset on a cost basis (not fair value).

Q: When testing the lease for classification purposes, what is the PV of the asset that the LESSOR, Low Falls, should use to compare with underlying asset’s fair value?

Group of answer choices

$40,000

$35,457

$30,010

$52,733

$48,000

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