Robbins, Inc. leased a machine from Ready Leasing Co.
The lease qualifies as a capital lease and requires ten annual payments
of $10,000 beginning immediately. The lease specifies an
interest rate of 12% and a purchase option of $10,000 at the end
of the tenth year, even though the machine’s estimated value on
that date is $20,000. Robbins’ incremental borrowing rate is
14%.

The present value of an annuity due of one at

12% for ten years is 6.328

14% for ten years is 5.946

The present value of one at

12% for ten years is .322

14% for ten years is .270

What amount should Robbins record as lease liability at the beginning
of the lease term?

(c) The lessee records a capital lease at the present value
of the minimum lease payments. The minimum lease payments
includes rental payments and bargain purchase options (among
other items). The $10,000 purchase option is a bargain purchase
option because it allows the lessor to purchase the leased
asset at an amount less than its expected fair value. The lessee
computes the present value using its incremental borrowing rate
(14%), unless the lessor’s implicit rate (12%) is lower and is
known by the lessee. This question indicates that the implicit
rate is stated in the lease; therefore it would be known to the
lessee. At the beginning of the lease term, Robbins should record
a leased asset and lease liability at $66,500.
PV of rentals ($10,000 × 6.328) = $63,280
PV of BPO ($10,000 × .322) = 3,220
PV at 12% $66,500