For the following lease, determine the amount the ROU asset will be initially measured at.
$\begin{array}{|l|l|}
\hline \text { Annual payment (due at end of year) } & \$ 22,000 \
\hline \text { Lease term } & 5 \
\hline \text { Incremental borrowing rate } & 10 \% \
\hline \text { Implicit rate (not readily determinable by lessee) } & 8 \% \
\hline \text { Unguaranteed residual value } & 15,000 \
\hline
\end{array}$

A)83,397
B)92,711
C)98,048
D)102,304

Question

For the following lease, determine the amount the ROU asset will be initially measured at. 
$\begin{array}{|l|l|}
\hline \text { Annual payment (due at end of year) } & \$ 22,000 \
\hline \text { Lease term } & 5 \
\hline \text { Incremental borrowing rate } & 10 \% \
\hline \text { Implicit rate (not readily determinable by lessee) } & 8 \% \
\hline \text { Unguaranteed residual value } & 15,000 \
\hline
\end{array}$

A)83,397
B)92,711
C)98,048
D)102,304

Quizplus · Accepted Answer

The initial measurement of the ROU (Right-of-Use) asset is the present value of the lease payments. Since the implicit rate is not readily determinable by the lessee, the incremental borrowing rate of 10% is used. The lease payments are $22,000 annually for 5 years. The unguaranteed residual value is not included in the lease liability calculation since it's not a part of the fixed payments. Using a financial calculator or present value formula, the present value of $22,000 per year for 5 years at 10% interest is approximately $83,397.

For the Following Lease, Determine the Amount the ROU Asset