Wildhorse Corporation enters into an agreement with Yates Rentals Co. on January

Question

Wildhorse Corporation enters into an agreement with Yates Rentals Co. on January 1, 2018 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $544864 are due on January 1 of each year. (b) The fair value of the machine on January 1, 2018, is $1450000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Wildhorse depreciates all machinery it owns on a straight-line basis. (d) Wildhorse’s incremental borrowing rate is 11% per year. Wildhorse does not have knowledge of the 9% implicit rate used by Yates. (e) Immediately after signing the lease, Yates finds out that Wildhorse Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful. If Yates records this lease as a direct-financing lease, what amount would be recorded as Lease Receivable at the inception of the lease?

a) $1634592

b) $544864

c) $905136

d) $1450000

Explanation / Answer

Solution:

If Yates records this lease as a direct-financing lease, amount would be recorded as Lease Receivable at the inception of the lease is fair value of machine i.e. = $1,450,000

Hence option d is correct.

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