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the text says that the initial setup of the asset/liability in a finance lease is done at the lower of pv or the fair value.
question:
a company can buy an asset for 5710 or lease at 2000/year for 4 years, paid in arrears. implicit interest rate is 15%.
the pv = 8000 x (1/(1.15)^4) = 4574.
so this is lower than the FV of 5710
but the workings of the lease payments uses 5710 as the starting balance.
why?
If you were to calculate
the present value of $2,000 in one year’s time ($1,739.1) and
the present value of $2,000 in two years’ time ($1,512.3) and
the present value of $2,000 in three years’ time ($1,315.0) and
the present value of $2,000 in four years’ time ($1,143.5) and
then add them up, it comes to $5,710
“8000 x (1/(1.15)^4) = 4574.” is not the same as $2,000 for 4 years at 15%
Maybe time to go back to F2?
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