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Compute the value of the lease liability

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Question - Lessee Company enters into a 6-year finance lease of non-specialized equipment with Lessor Company on January 1, 2020. Lessee has agreed to pay $39,200 annually beginning immediately on January 1, 2020. The lessor estimates the residual value of the equipment to be $7,000 at lease end, and the lessee guarantees the residual value. The economic life of the asset is 7 years. The lessee's incremental borrowing rate is 7% and the lessor's implicit rate is not readily determinable by the lessee company.

Compute the value of the lease liability for the lessee on January 1, 2020, under the following separate scenarios.

a. The lessee estimates that the underlying asset will have a fair value of $7,000 at the end of the lease.

b. The lessee estimates that the underlying asset will have a fair value of $2,800 at the end of the lease.

Reference no: EM133146547

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