CFA Practice Question

CFA Practice Question

A firm acquires an asset via an operating lease that has a fair market value of $65,000. The operating lease requires rental payments of $18,095 per year for 3 years. The implicit interest rate is 10%. How much of the first year's lease payment will the firm deduct as rental expense on its income statement?
A. $18,095
B. $13,595
C. $6,500
Explanation: The lessee recognizes the full amount of the rental expense in an operating lease. This contrasts with a capital lease where a portion of the lease payment is allocated as a reduction of lease liability and only the interest portion of the rental payment is deductible (along with depreciation).

User Contributed Comments 3

User Comment
shoara ????
hoyleng less than 90% of MV.
HolzGe1 no need to calculate the PV vs. 90% of MV; its stated in the question it's an operating lease!
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