Plessings Company leased a piece of machinery to Banana, Inc. on January 1, 2019. The lease is correctly classified as a sales-type lease. Plessings will receive three annual lease payments of $20,700, with the first one received on January 1, 2019. There is no guaranteed or unguaranteed residual value. The fair value of the machine is $50,000 and Plessings incurs initial direct costs of $5,000. What is the implicit rate assuming the initial direct costs are deferred?

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Business

Akira

5 February, 18:38

Plessings Company leased a piece of machinery to Banana, Inc. on January 1, 2019. The lease is correctly classified as a sales-type lease. Plessings will receive three annual lease payments of $20,700, with the first one received on January 1, 2019. There is no guaranteed or unguaranteed residual value. The fair value of the machine is $50,000 and Plessings incurs initial direct costs of $5,000. What is the implicit rate assuming the initial direct costs are deferred?

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Diamond Erickson · Answer 1

7.49%

Explanation:

n = Number of payment periods = 3

P = Total lease payment = Annual lease payment * Number of period = $20,700 * 3 = $62,100

FV = fair value of the machine = $50,000

Implicit rate = [ ($62,100 / $50,000) ^ (1 / 3) ] - 1 = 0.0749, or 7.49%