For the following lease, determine the amount the ROU asset will be initially measured at.
$\begin{array}{|l|l|}
\hline \begin{array}{l}
\text { Annual payment (due at commencement date of } \
\text { lease) }
\end{array} & \$ 23,000 \
\hline \text { Lease term } & 5 \
\hline \text { Incremental borrowing rate } & 10 \% \\hline \text { Implicit rate (readily determinable by lessee) } & 8 \% \
\hline \text { Unguaranteed residual value } & \text { NA } \
\hline \text { Guaranteed residual value } & 20,000 \
\hline \text { Expected payout under guarantee } & 14,000 \
\hline
\end{array}$
A)93,792
B)103,792
C)107,794
D)108,759

Question

For the following lease, determine the amount the ROU asset will be initially measured at. 
$\begin{array}{|l|l|}
\hline \begin{array}{l}
\text { Annual payment (due at commencement date of } \
\text { lease) }
\end{array} & \$ 23,000 \
\hline \text { Lease term } & 5 \
\hline \text { Incremental borrowing rate } & 10 \% \\hline \text { Implicit rate (readily determinable by lessee) } & 8 \% \
\hline \text { Unguaranteed residual value } & \text { NA } \
\hline \text { Guaranteed residual value } & 20,000 \
\hline \text { Expected payout under guarantee } & 14,000 \
\hline
\end{array}$
A)93,792
B)103,792
C)107,794
D)108,759

Quizplus · Accepted Answer

The initial measurement of the ROU (Right-of-Use) asset includes the present value of lease payments and any guaranteed residual value expected to be payable by the lessee. Here, the lease payments are $23,000 annually for 5 years, and the guaranteed residual value expected to be payable is $14,000. The discount rate to use is the lower of the lessee's incremental borrowing rate or the implicit rate when the implicit rate is readily determinable, which is 8% in this case. The calculation involves discounting the annual payments and the guaranteed residual value at 8%. The present value of the lease payments can be calculated using a financial calculator or PV formula, and adding the present value of the guaranteed residual value gives the initial measurement of the ROU asset.

For the Following Lease, Determine the Amount the ROU Asset