This is a capital lease. What dollar amount will JK capitalize for this lease on

Question

This is a capital lease. What dollar amount will JK capitalize for this lease on 1/1/2010(before the required 1/1/2010 payment is made)?

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Question 16 options:

$43,093

$55,893

$54,268

$50,093

$43,093

$55,893

$54,268

$50,093

The following facts pertain to a noncancelable lease between JK Co. and Lessor Inc. 1/1/2010 Inception date Annual lease payment due each January 1, beginning with $12,800 January 1, 2010 (excluding executory costs) Lease term (years) Economic life of equipment (years) Book value (equal to cost) of the equipment to lessor Fair value of the equipment on January 1, 2010 Expected residual value of equipment at end of lease term $55,000 $60,000 (guaranteed by JK) Lessee's incremental borrowing rate Lessor's implicit interest rate Annual executory costs are paid by lessee at the beginning $2,500 9% 10% $1,500 of year The equipment reverts back to lessor at the end of the lease term. JK has never had any problems paying its bills as th straight-line method for depreciation come due. Lessor provide s no ongoing services under the lease. Use

Explanation / Answer

AMOUNT TO BE CAPITALISED FOR LEASE

LOWER OF THE FOLLOWING: (lower of 1 or 2)

1)PRESENT VALUE OF (LEASE RENTAL + GURANTEED RESIDUAL VALUE)

2)FAIR VALUE OF ASSET

i.e.

ANNUAL LEASE RENTAL=12800 , GURANTEED RESIDUAL VALUE BY JK= 2500

IMPLICIT INTREST RATE=10%

PRESENT VALUE FACTOR FOR TOTAL 5 YEARS=3.79078

PRESENT VALUE FACTOR AT END OF 5 YEARS= 0.62092

1)12800*3.7907 + 2500* 0.6209 = 50093

2)60000

lower is 50093 (option D)

WORKING NOTE

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