[Kairos]

I remember figuring out this problem before but I can’t seem to get it again. Could someone walk me through this? Thanks!!

On January 1, of the current year, Tree Co. enters into a five-year lease agreement for production equipment. The lease requires Tree to pay $12,500 per year in lease payments. At the end of the five year lease term, Tree can purchase the equipment for $30,000. The fair value of the equipment is $75,000. The estimated useful life of the equipment is 10 years. The present value of the lease payments is $50,000. The present value of the purchase option is $20,000. Tree’s controller believes the purchase option price is sufficiently below the expected fair value of the equipment at the date the option becomes exercisable to reasonably assure its exercise. Tree would normally depreciate equipment of this type using the straight-line method. What amount is the carrying value of the asset related to this lease at December 31, of the current year?

A. $40,000

B. $45,000

C. $56,000

D. $63,000

[Kairos]

The answer is D but i'm having trouble deriving the calculations. Can anyone help?

[Credit Revenue]

70,000 / 10 is 7,000. 70,000-7,000 is 63,000

A - 79 expires 4/30/16 need a pass on REG
B - 78
F - 80
R - 83!!! Can live again!

[Kairos]

Alright I think I have the calculation down. The asset will be worth the present value of the lease payments 50,000 and the present value of the purchase option which is 20,000. Add those together and you get 70,000. Because one year has past, you must depreciate the asset by 10% (10 years) thus giving you 70,000 – 7000 = 63,000.

Can anyone tell me if this is correct or not?

Thanks!

[Kairos]

Thanks Credit Revenue, you beat me to it. Really appreciate the help!!

[Credit Revenue]

YW

A - 79 expires 4/30/16 need a pass on REG
B - 78
F - 80
R - 83!!! Can live again!

[2MoreLeft]

I think the the lease liability is different from the leased asset figure. The purchase option adds to the pv of the lease payments or the lease liability.. Not to the value of the asset on the books.. The asset is still at 50,000 and would be depreciated over 10 years therefore I think it's 50k-5k(depr)= 45k.. Where did you get this question? What was the answer? It just makes no sense to me why the bpo would be added to value of asset.. I think Becker has the rule on pages f5-13 and 14 .. It seems to say that pv of bpo is added to capitalized cost.. But then on f5-13 it says that pv of bpo is added to pv of minimum lease payments.. Can someone explain?

Nvm.. I think that credit revenue is right as per Wiley text.. Which states that the pv of bpo would be included in asset's recorded value.. Another question I saw on this board confused me and gave me the impression that the asset recorded is different from the lease liability value..

Passed 3.. Had one to go.. Couldn't pass it.. All expired.. Starting from scratch..

[Mike J]

Shouldn't there be interest expense, in addition to the depreciation expense? This one gave me fits because there wasn't an interest rate given.

AUD - 90
BEC - 79
FAR - 77
REG - 77

They don't trust JUST ANYBODY to count beans

[vodrldnr]

Pay attention to what they are asking now.

they are asking Carrying amount of asset.

First, is this capital lease or operating lease ? it is capital lease since it is about 93 1/3 % MLP over FV.

What the capital lease mean ? you have significant ownership over this asset. Therefore you have to use U/L of asset(NOT lease term) to depreciate it.

70,000 / 10 = 7,000 PER YEAR

ANSWER : 63,000

It ain't About How Hard You Hit

[Author]

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