Question

On January 1, 20X1, Tucker Company leases equipment from Franz Inc. over the equipment's entire estimated useful life of five years. Franz acquired the asset for $431,213 and normally utilizes an interest rate of 8% for these types of transactions. The annual rental payment is $100,000; the first payment is due on January 1, 20X1. At the commencement of the lease, Tucker should recognize it by

Answer 1

Answer:

At the commencement of the lease, Tucker should recognize it by $399,300.

Explanation:

For the sake of this question, i assume that you are aware of the latest development  "IFRS 16 - Leases".

In accordance with IFRS 16 - Leases, Tucker should recognise the lease liability.

Lease liability = Present value of lease payments that have not been paid.

Present value = This can easily be determined by the cumulative present value table.

The implicate rate of lease = 8% (as known in the question) will be used as discount factor.

Since, we know that the first payment is due, therefore, we will use the discount factor of 8% at year 5 = 3.993

Lease liability at January 1, 20X1 = $100,000 × 3.993 = $399,300.

Thank you.