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Basic Question 4 of 16
Eagle Company leased some factory equipment from McNabb Leasing Inc. with annual lease payments of $120,000 over a five-year period. The lease payment includes $5,000 in executory costs. Eagle accounts for the lease as a capital lease using a discount rate of 8%. The present value of $1 for 5 periods at 8% is .68058. The present value of an annuity of $1 for 5 periods at 8% is 3.99271. At what amount should the leased asset be recorded on Eagle's books?
B. $391,334
C. $459,162
A. $0
B. $391,334
C. $459,162
User Contributed Comments 9
| User | Comment |
|---|---|
| isida | executory costs are not included in calculating the PV of the lease payments!!! |
| skonko | why are executory costs excluded in the calculation? |
| mtcfa | What exactly are executory costs? |
| wuyi | Executory Cost: utilities, insurance, maintenance, and taxes included in the periodic payment, but not for the 'leasing' or rental expense. Such costs paid separately to the lessor or to another party, are not executory costs. |
| o123 | ...and it seems these executory costs occur in every period aswell. |
| steved333 | They do occur, but they are separate from the actual lease payment. They would be accounted for in addition to the pmts, and they are a flat pmt, so there is no imputed interest on the executory costs, only the capitalized lease pmts. |
| Gpcurve | n=5 i=8 PMT=115000 PV |
| johntan1979 | So where do executory costs go on Eagle's books? |
| Shaan23 | I made this a bit trickier. Thought the first lease payment was at time = 0 --- that's how the textbook question was and how it would be in most real life scenerios. Annuity due = Annuity Immediate * (1 + i) if the question was like that |
I just wanted to share the good news that I passed CFA Level I!!! Thank you for your help - I think the online question bank helped cut the clutter and made a positive difference.
Edward Liu
Learning Outcome Statements
explain the financial reporting of leases from the perspectives of lessors and lessees
CFA® 2024 Level I Curriculum, Volume 2, Module 8.