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lets say , A company enter in a financial lease with B company respect with an asset that B company have purchases with $12,000 , however at the date of the commencement of the lease the asset only have a fair value $10,000 . Company B required Company A pay $5000 per annum in the year end for next 4 years .
In the point of company B , it has a result of IRR 24% ( the interest rate implicate in the lease ) However, we only capitalize the $10,000 ( the lower between the fair value of the asset and present value of minimum lease payment )
This will result even the lease term have cease , the liability account still remain $178.24
so what is the treatment for the remaining balance ?
If you were to calculate this accurately, you would see that the rate implicit in the lease is 24.098864% and, with that rate applied, there is no amount of $178.24 left as a liability at the end of the lease
You can’t simply say “The rate is 24%” and then find a remainder
the rate implicit in the lease is that rate that, when applied, calculates the present value of the minimum lease payments to be exactly the value of the obligation and, in the example that you have set up ($12,000, 4 years, $5,000 per annum in arrears) the rate is 24.098864%
OK?
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