Free Company lessee leases a machine from Denner Corp lessor

Free Company (lessee) leases a machine from Denner Corp. (lessor) under an agreement which meets the criteria to be a finance lease for Free. The six-year lease requires payment of $136,000 at the beginning of each year, including $20,000 per year for maintenance, insurance, and taxes paid to third parties. The incremental borrowing rate for the lessee is 10%; the lessor\'s implicit rate is 8% and is known by the lessee. The present value of an annuity due of 1 for six years at 8% is 4.99271. The present value of an annuity due of 1 for six years at 10% is 4.79079. Free should record the Right to Use Asset at Select one: a. $579,154. b. $679,008. c. $555,732. d. $651,548.

Solution

Free Company (lessee) leases a machine from Denner Corp. (lessor) under an agreement which meets the criteria to be a finance lease for Free. The six-year lease requires payment of $136,000 at the beginning of each year, including $20,000 per year for maintenance, insurance, and taxes paid to third parties. The incremental borrowing rate for the lessee is 10%; the lessors implicit rate is 8% and is known by the lessee. The present value of an annuity due of 1 for six years at 8% is 4.99271. The present value of an annuity due of 1 for six years at 10% is 4.79079. Free should record the Right to Use Asset at

ANS. B.$679,008.