Hi all, Have a question: for the finance lease, the annual lease payment is 10,000 for 4 years. The appropriate interest rate is 6%. The fair value of leased asset is 30,000. We can calculate the present value of the lease payment at 6% is 34,651. The asset and liability recognized on the leesee’s balance sheet is the lower of the present value of the lease payments or the fair value of the leased asset, therefore 30,000. For the interest expense, what is the appropriate interest rate in this case? 6% or rate greater than 6%?
Anyone?
I’ve never seen this before, so I’m not sure.
Where did you encounter this example, pray tell.
I made it. I cannot find an example in the book that the fair value is less than PV of the lease payment. I think in this case the interest rate is not 6%, otherwise the lease liability at the end of year 4 is not 0.
I wouldn’t bother with it; it won’t be on the exam.
I think 6% x 34,651$ is our interest expense for first year.