Asked by Brandon Morrone on May 07, 2024
Verified
If a lease contains a residual value guarantee,the lessee must
A) add the guaranteed amount to the present value of the minimum lease payments.
B) add the present value of the guaranteed amount to the present value of the minimum lease payments.
C) include the guaranteed amount in the minimum lease payments only if the lessee intends to keep the asset at the end of the lease.
D) ignore the guaranteed amount if the lessee intends to keep the asset at the end of the lease.
Residual Value Guarantee
A promise that at the end of a lease, the asset being leased will have a certain value, often used in finance and leasing agreements.
Minimum Lease Payments
The total of all lease payments that the lessee is required to make over the lease term, excluding executory costs.
Present Value
The present value of a future amount of money or series of cash flows, calculated using a designated rate of return.
- Understand how residual value guarantees impact the valuation of lease liabilities and assets.
Verified Answer
WS
Winston ShustockMay 08, 2024
Final Answer :
B
Explanation :
If a lease contains a residual value guarantee, the lessee must add the present value of the guaranteed amount to the present value of the minimum lease payments. This is because the residual value guarantee represents an additional liability for the lessee, as they may have to pay the difference between the guaranteed amount and the realized residual value at the end of the lease. Adding the present value of the guaranteed amount to the present value of the minimum lease payments reflects this additional liability and provides a more accurate representation of the total lease cost for the lessee.
Learning Objectives
- Understand how residual value guarantees impact the valuation of lease liabilities and assets.