Tea Tree Ltd enters into a non-cancellable five-year lease agreement with Top Machines Ltd on 1 July 2020. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $647,192. The machinery is expected to have an economic life of six years, after which time it will have an expected residual value of $105,000. There is a bargain purchase option that Tea Tree Ltd will be able to exercise at the end of the fifth year for $140,000. There are to be five annual payments of $175,000, the first being made on 30 June 2021. Indluded within the $175,000 lease payments is an amount of $17,500 representing payment to the lessor for the insurance and maintenance of the equipment. The equipment is to be depreciated on a straight- line basis.
Tea Tree Ltd enters into a non-cancellable five-year lease agreement with Top Machines Ltd on 1 July 2020. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $647,192. The machinery is expected to have an economic life of six years, after which time it will have an expected residual value of $105,000. There is a bargain purchase option that Tea Tree Ltd will be able to exercise at the end of the fifth year for $140,000. There are to be five annual payments of $175,000, the first being made on 30 June 2021. Indluded within the $175,000 lease payments is an amount of $17,500 representing payment to the lessor for the insurance and maintenance of the equipment. The equipment is to be depreciated on a straight- line basis.
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter19: Lease Financing
Section: Chapter Questions
Problem 8MC: Lewis’s management has been considering moving to a new downtown location, and they are concerned...
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a) Determine the rate of interest implicit in the lease and calculate the present value ofthe lease payments.
b) Prepare the
c) Prepare the portion of the
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