Reference no: EM132490361

Question - Larkspur Leasing Company agrees to lease equipment to Cullumber Corporation on January 1, 2020. The following information relates to the lease agreement.

1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.

2. The cost of the machinery is $505,000, and the fair value of the asset on January 1, 2020, is $719,000.

3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $45,000. Cullumber estimates that the expected residual value at the end of the lease term will be 45,000. Cullumber amortizes all of its leased equipment on a straight-line basis.

4. The lease agreement requires equal annual rental payments, beginning on January 1, 2020.

5. The collectibility of the lease payments is probable.

6. Larkspur desires a 9% rate of return on its investments. Cullumber's incremental borrowing rate is 10%, and the lessor's implicit rate is unknown.

(Assume the accounting period ends on December 31.) Compute the value of the lease liability to the lessee.

Suppose Cullumber expects the residual value at the end of the lease term to be $35,000 but still guarantees a residual of $45,000. Compute the value of the lease liability at lease commencement.