On January 1, 2010, Matilda Company signed a four-year lease requiring annual payments of $15, 000 with the first payment due on January 1, 2010.The fair value of the equipment leased was $50, 000.Matilda's incremental borrowing rate was 6%.Actuarial information for 6% follows: $\begin{array}{llr}
&\text {3 Periods}&\text {4 Periods}&\text {5 Periods}\
\text { Present value of an annuity due of \$ } &2.83339&3.67301&4.46511\
\text { Present value of ordinary annuity of 1 \$} &2.67301&3.46511&4.21236\
\end{array}$
Assuming the lease qualifies as a capital lease, what amount should be recorded as leased equipment under capital leases on January 1, 2010 (rounded to the nearest dollar)?
A)$48, 185
B)$50, 000
C)$51, 977
D)$55, 095

Question

On January 1, 2010, Matilda Company signed a four-year lease requiring annual payments of $15, 000 with the first payment due on January 1, 2010.The fair value of the equipment leased was $50, 000.Matilda's incremental borrowing rate was 6%.Actuarial information for 6% follows: $\begin{array}{llr}
&\text {3 Periods}&\text {4 Periods}&\text {5 Periods}\
  \text { Present value of an annuity due of \$ } &2.83339&3.67301&4.46511\
 \text {   Present value of ordinary annuity of 1 \$} &2.67301&3.46511&4.21236\
\end{array}$
 Assuming the lease qualifies as a capital lease, what amount should be recorded as leased equipment under capital leases on January 1, 2010 (rounded to the nearest dollar)?
A)$48, 185
B)$50, 000
C)$51, 977
D)$55, 095

Quizplus · Accepted Answer

Since the lease qualifies as a capital lease, the amount recorded as leased equipment under capital leases should be the lower of the fair value of the leased asset or the present value of the lease payments. The fair value of the equipment is $50,000. The lease payments are an annuity due because the first payment is made at the beginning of the lease term. Using the present value of an annuity due for 4 periods at 6%, the calculation is $15,000 * 3.67301 = $55,095.15. However, since the fair value of the equipment ($50,000) is less than the present value of the lease payments, $50,000 is the correct amount to record as leased equipment.

On January 1, 2010, Matilda Company Signed a Four-Year Lease