In computing the present value of the minimum lease payments, the lessee should
A) use its incremental borrowing rate in all cases.
B) use either its incremental borrowing rate or the implicit rate of the lessor, whichever is higher, assuming that the implicit rate is known to the lessee.
C) use either its incremental borrowing rate or the implicit rate of the lessor, whichever is lower, assuming that the implicit rate is known to the lessee.
D) None of these answers are correct.

Question

Quizplus · Accepted Answer

The lessee should use either its incremental borrowing rate or the implicit rate of the lessor, whichever is lower, for computing the present value of the minimum lease payments, provided that the implicit rate is known to the lessee. This approach ensures the lessee does not overstate its lease liabilities.

In Computing the Present Value of the Minimum Lease Payments