On January 1, 2018, Jasperse Corporation leased equipment under a finance lease designed to earn the lessor a 12% rate of return for providing long-term financing. The lease agreement specified ten annual payments of $60,000 beginning January 1, and each December 31 thereafter through 2026. A 10-year service agreement was scheduled to provide maintenance of the equipment as required for a fee of $4,500 per year. Insurance premiums of $3,500 annually are related to the equipment. Both amounts were to be paid by the lessor and lease payments reflect both expenditures. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

At what amount will Jasperse record a right-of-use asset?

PV factors based on
Table or Calculator function: PVAD of $1
Lease Payment
n = 10
i = 12%
Right-of-use asset

In calculating the Right - of - use- asset, the relevant figure to be used is the lease payments as the Right of use Asset is the present value of all the lease payments.

The Lease payment of $60,000 above is already said to include the maintenance cost of $ 4,500 a year. This will have to be removed from the amount so as to find the true lease payment.

= 60,000 - 4,500

= $55,500 is the actual lease payment annually.

Since this is a constant payment, it is an annuity and hence can be calculated as an Annuity.

Because the first payment was on the first day of January this should be treated as an Annuity Due so the Right-of-use asset is a Present Value of Annuity Due (PVAD).

The period is 10 years and the rate of return is 12%.

The Right-of-use asset = 55,000 * (Present Value of Annuity Due, 10 periods, 12%) (refer to table).

= 55,000 * 6.3282

= $351,215.10