In computing the present value of the lease payments, the lessee should Entry field with incorrect answer use its incremental borrowing rate in all cases. Use the implicit rate in all cases. Use the implicit rate of the lessor, assuming that the implicit rate is known to the lessee. Use both its incremental borrowing rate and the implicit rate of the lessor, assuming that the implicit rate is known to the lessee

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18-11-2022
Business

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In computing the present value of the lease payments, the lessee should Entry field with incorrect answer use its incremental borrowing rate in all cases. Use the implicit rate in all cases. Use the implicit rate of the lessor, assuming that the implicit rate is known to the lessee. Use both its incremental borrowing rate and the implicit rate of the lessor, assuming that the implicit rate is known to the lessee

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Neetuverma Neetuverma · Answer 1 · 2022-11-23T05:20:40+01:00

The lessee should use either its incremental borrowing rate or implicit rate of lessor, whichever is lower, assuming that implicit rate is known to the lessee.

What is incremental borrowing rate?

The incremental borrowing rate is defined as " rate of interest that a lessee would have to pay to borrow on collateralized basis for similar term an amount equivalent to the lease payments in similar economic situation" in ASC 842, one of the new lease accounting standards. According to ASC 842, lessees should use the implicit rate in a lease to assess the obligation for a lease by estimating the present value of future lease payments. A business must utilize the "incremental borrowing rate" if it is unable to ascertain the implicit rate in a lease. Knowing how to determine the incremental borrowing rate is crucial since it frequently happens that the implicit rate is unavailable.

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