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)101,360
B)104,600
C)108,707
D)112,791

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)101,360
B)104,600
C)108,707
D)112,791

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 lower rate between the incremental borrowing rate (10%) and the implicit rate (8%) should be used for discounting, which is 8% in this case. Calculating the present value of these cash flows (using a financial calculator or present value formula) at 8% will give the initial measurement of the ROU asset, which is approximately $108,707.

For the Following Lease, Determine the Amount the ROU Asset