I am confused on the answer to this question. I thought that a lessee includes the present value of the lease payment plus **any anticipated loss** on the fair value of any guaranteed residual value. The residual value in the problem is 20K and guaranteed. I thought that as long as the fair value of the residual did not decrease, the lessee ignores it from calculating the lease acquisition. If for example the lessee guaranteed $20K but estimated that the asset would only be worth $10K at the end of the lease, then it would include the present value of $10K into the balance sheet.

I answered A because the problem doesn't say that the residual will fall below $20K at the end of the lease. B is the correct answer (adding the present value of the residual)

A company leases a machine from Leasing, Inc. on January 1, year 1. The lease terms include a $100,000 annual payment beginning January 1, year 1. The machine's fair value is $500,000 and the residual value is estimated at $20,000. The company guarantees the residual value. The useful life of the machine is six years, and the lease term is five years. The implicit rate of interest is 6% and is known by the company. The following present value factors are provided:

Five Years Six Years

Present value of $1 at 6% 0.7473 0.7050

Present value of an annuity due at 6% 4.4651 5.2124

Present value of an ordinary annuity at 6% 4.2124 4.9173

What is the value of the machine in the company's balance sheet at lease inception?

A.

$446,510

B.

$461,456

C.

$520,000

D.

$535,340