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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Guaranteed and Unguaranteed Residual Values Grygiel Company leases a nonspecialized machine with a lair value of $50,000 to Baker Company. The lease has a life of 6 years and requires a $10,000 payment at the end of each year. The lease does not include a transfer of ownership nor a bargain purchase option, and the life of the lease is less than a major part of the expected economic life of the machine. It is probable that Grygiel will collect the lease payments plus any amount necessary to satisfy a residual value guarantee. Round your answers to the nearest dollar.

Required:

  1. 1. Next Level If the interest rate implicit in the lease is 10%, compute the machine’s expected residual value.
  2. 2. Next Level If the residual value is guaranteed by Baker, how would each company classify the lease?
  3. 3. Next Level If the residual value is not guaranteed by Baker but is instead guaranteed by a third party, how would each company classify the lease?

1.

To determine

Compute the Machine’s expected residual value.

Explanation

Lease: Lease is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’.

Compute the present value of the lease payments:

Present value of the lease payments= (Annual lease payments×PV factor for 6 payments at 10% rate of interest)= $10,000×4.355261= $43,552(rounded)

Compute the present value of the residual value:

ParticularsAmount ($)<

2.

To determine

Assuming that the residual value is not guaranteed by Company B, Explain the manner that each company would classify the lease.

3.

To determine

Assuming that the residual value is not guaranteed by Company B, Explain the manner that each company would classify the lease.

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