Reference no: EM132965424

Question 1 - On January 1, 2020, Lessor Corp. entered into a contract to lease an equipment to Lessee Co. with the following terms:

The lease term is five years, with payments due on the first day of the year.

The first payment is due on January 1, 2020.

The equipment has a FV of $300,000 on January 1, 2020.

There is no BPO or guaranteed residual value at the end of the lease.

Lessee has an IBR of 9%, and Lessee is aware of Lessor's rate of 10%.

The equipment has an estimated useful life of six years.

Both the lessor and the lessee use straight-line amortization.

The annual lease payment equals $70,733, which includes a $4,000 reimbursement to Lessor for insurance costs paid by the lessor to the insurance company.

Both Lessor and Lessee report under ASPE.

What is the PV of the minimum lease payments for this lease?

a) $299,888

b) $282,929

c) $294,947

d) $278,268

Question 2 - On January 1, 2020, Local Builders Inc. (LBI) leased a new excavator from Bear Corp. The fair market value of the excavator on January 1, 2020, is $490,000. Relevant details regarding the lease agreement are as follows:

The lease agreement is for 12 years.

Annual payments of $55,000 are due at the beginning of each year, starting January 1, 2020.

Included in the annual payments are maintenance fees of $5,000.

The implicit rate is 6% and the IBR is 6.5%.

The equipment has an estimated useful life of 14 years.    

Both LBI and Bear Corp. report under ASPE.

LBI has determined that this is a capital lease. What is the balance of the lease liability for LBI at the end of December 31, 2020?

a) $394,344

b) $418,005

c) $409,442

d) $459,805