On December 31, year 1, Day Co. leased a new machine from Parr with the followin

Question

On December 31, year 1, Day Co. leased a new machine from Parr with the following pertinent information: Lease term 8 years Annual rental payable at beginning of each year $60,000 Useful life of machine 10 years Day's incremental borrowing rate 15% Implicit interest rate in lease (known by Day) 12% The lease is not renewable, and the machine reverts to Parr at the termination of the lease. The cost of the machine on Parr's accounting records is $425,000. Required: At the beginning of the lease term, what should Day record as a lease liability?

Explanation / Answer

Ownership is transferred - NO Written Bargain - No 90% of Fair market value is not known 75% of useful life of the asset - Yes (since 8 years out of 10 years is more than 75% of the useful life) Annual Rental payout - $ 60,000 Present value of an annuity of 1 in advance for 8 periods at 12% - 5.56376 So the value is $ 60,000 * 5.56376 The amount to be recognised as lease liability is $ 333,826.00

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