For the following lease, determine the amount the ROU asset will be initially measured at.
$\begin{array}{|l|l|}
\hline \begin{array}{l}
\text { Annual payment (due at end of } \
\text { year) }
\end{array} & \$ 25,000 \
\hline \text { Lease term } & 5 \
\hline \text { Incremental borrowing rate } & 7 \% \\hline \begin{array}{l}
\text { Implicit rate (readily } \
\text { determinable by lessee) }
\end{array} & 6 \% \
\hline \begin{array}{l}
\text { Non-lease costs included in } \
\text { annual payment }
\end{array} & 2,000 \
\hline
\end{array}$
A)94,305
B)96,884
C)102,505
D)105,309

Question

For the following lease, determine the amount the ROU asset will be initially measured at. 
$\begin{array}{|l|l|}
\hline \begin{array}{l}
\text { Annual payment (due at end of } \
\text { year) }
\end{array} & \$ 25,000 \
\hline \text { Lease term } & 5 \
\hline \text { Incremental borrowing rate } & 7 \% \\hline \begin{array}{l}
\text { Implicit rate (readily } \
\text { determinable by lessee) }
\end{array} & 6 \% \
\hline \begin{array}{l}
\text { Non-lease costs included in } \
\text { annual payment }
\end{array} & 2,000 \
\hline
\end{array}$
A)94,305
B)96,884
C)102,505
D)105,309

Quizplus · Accepted Answer

The initial measurement of the ROU (Right-of-Use) asset is the present value of the lease payments. Here, the annual lease payment is $25,000, but it includes $2,000 of non-lease costs, so the actual lease payment is $23,000 annually. The lease term is 5 years, and the lower of the incremental borrowing rate or the implicit rate should be used for discounting, which is 6% in this case. Calculating the present value of $23,000 over 5 years at a 6% discount rate gives $96,884.

For the Following Lease, Determine the Amount the ROU Asset