On October 1, 2018, Sonoma Company leased equipment from Napa Inc

Finance Apr 19, 2021

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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