Is residual value included in the NPV calculation for leases?
When calculating the NPV of future minimum lease payments, we would multiply the annual guaranteed lease payments by the present value factor. However, if there is residual value and its guaranteed, then it would be included in the calculation. If the residual value is unguaranteed, then it would be excluded from the calculation.
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How to calculate the net present value of future minimum lease payments for finance leases?
The formula is quite simple – you just multiply the annual lease payment by the present value factor, and that results in the net present value of future minimum lease payments, which is recorded on the balance sheet as the lease liability (and ROU asset). For example, let’s say the following information is available: The […]
Is the implicit rate or incremental borrowing rate used for finance leases?
When you calculate the net present value of future minimum lease payments, the rule is that you will always use the implicit rate if it is available. The incremental borrowing rate (IBR) is only used the implicit rate is not available.
What is the journal entry to record the amortization expense for a finance lease?
On the lease inception (start) date, the company would capitalize the finance lease onto the balance sheet based on the net present value of future minimum lease payments. The company then needs to amortize the ROU asset. Annual amortization expense is calculated as the ROU asset divided by the lease life. So, if the ROU […]