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Homework answers / question archive / On December 31, 2019, Blossom Company leased machinery from Terminator Corporation for an agreed upon lease term of 3 years
On December 31, 2019, Blossom Company leased machinery from Terminator Corporation for an agreed upon lease term of 3 years. Blossom agreed to make annual lease payments of $22,000, beginning on December 31, 2019. The expected residual value of the machinery at the end of the lease term is $11,000. Blossom guarantees a residual value of $11,000 at the end of the lease term, which equals the expected residual value of the machinery.
What amount will Blossom record as its lease liability if the expected residual value at the end of the lease term is $7,000 and Blossom guarantees a residual of $11,000. Its incremental borrowing rate is 10% and the implicit rate of the lease is unknown? (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answer to 0 decimal places, e.g. 5,275.)
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Lease liability
Computation of Lease Liability:
PV of Lease Payment = 22,000 * Cumulative PV factor at 10% for 3 periods of annuity due
=$22,000*2.7355
= $60,181
PV of Residual Value = (11000-7000)*0.7513 = $3,005
Lease Liability = 60,181+3,005 = $63,186
