Reference no: EM133070573
Burt Ltd enters into a non-cancellable 7-years lease agreement with Earnie Ltd on 1 July 2023. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $1,113,114.
The machinery is expected to have an economic life of 9 years, after which time it will have an expected residual value of $250,000. There is a bargain purchase option that Burt Ltd will be able to exercise at the end of the 7th year for $280,000.
There are to be 7 annual payments of $300,000, the first being made on 30 June 2024. Included within the $300,000 lease payments is an amount of $40,000 representing payment to the lessor for the insurance and maintenance of the equipment. The equipment is to be depreciated on a straight-line basis.
Required:
a) Determine the rate of interest implicit in the lease and calculate the present value of the lease payments. In this question the implicit rate is (percent):
Formula and explanation
Proof (Enter the proof in the table below)
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Description
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Calculation
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Total
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Periodic lease payments
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Bargain purchase option
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Fair value at lease inception
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I am unable to understand the calculation of the rate of interest implicit. Can you please explain it on paper in a simple way and formula that you use while calculating the value of the rate of interest implicit? How do you get the value of the implicit interest rate? Can you please simplify it on paper instead of excel?
And what will be the calculation, formula total for Periodic lease payments and Bargain purchase option? What will be the total Fair value at lease inception and how it will be calculated?
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