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On October 1, 2018, Sonoma Company leased equipment from Napa Inc
On October 1, 2018, Sonoma Company leased equipment from Napa Inc. in lease payable in five equal annual payments of $500,000, beginning Oct 1, 2019. Similar transactions have carried an 11% interest rate. Sonoma Company expects the residual value at Oct. 1, 2023 to be $30,000. Negotiations led to Napa Inc. guaranteeing a $50,000 residual value. The right-of-use asset would be recorded at:
- $2,500,000
- $1,847,950
- $1,859,819
- None of these answer choices is correct
Expert Solution
Computation of Right-of-Use Asset:
Right-of-Use Asset = Annual Payment*PVAF @11%,5 year
= $500,000*3.6959
= $1,847,950
So, the correct option is 2nd "$1,847,950".
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