Luv Company enters into a non-cancelable lease agreement with Soap Company. The details of the agreement are as follows:
|
Inception date |
Jan 1, 2011 |
|
|
Annual lease payment at beginning of each year, starting Jan 1, 2011 |
$18,000 |
|
|
Bargain-purchase option at the end of the lease |
$4,000 |
|
|
Lease term |
5 years |
|
|
Economic life of leased equipment |
||
|
Lessor’s cost |
$60,000 |
|
|
Fair value of asset |
$70,000 |
|
|
Lessor’s implicit rate |
10% |
|
|
Lessee’s implicit rate |
||
|
Present value of annuity due i=10%, n=5 periods |
4.16987 |
|
|
Present value i=10%, n=5 years |
0.621 |
Soap company will receive the lease payments. The collectability of the lease payments is reasonably predictable and there are no uncertainties surrounding the costs to be incurred by Soap company—the lessor.
