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the text says that the initial asset/liability to book an asset in a finance lease is to use lower of the minimum lease payments and fair value of the leased asset.
in a question it says: “a company has two options. it can buy an asset for cash at a cost of 5710 or lease where in the primary period, the payments will be 2000 pa for 4 years. the interest rate implicit in the lease is 15%.”
if we were to compute the present value, it wd be (1/(1.15)^4)* 8000
this is 4574. since this is lower than 5710, shdnt this be the value of asset booked at inception?
what am i missing?
thanks
You need to discount the 4 individual payments of 2,000. You don’t say whether the four installments are paid in advance or in arrears but, assuming they are in arrears, the values are respectively:
1,739, 1,512, 1,315 and 1,144 and that’s a total of 5,710
If the payments are in arrears, the 4 respective values are:
2,000, 1,739, 1,512 and 1,315 and that’s a total of 6,566
The question has obviously been calculated to give a discounted value exactly the same as the cash price
Do you see now where you have gone wrong?
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