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Com jeffrey company a manufacturer of water purifiers

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Unformatted text preview: manufacturer of water purifiers, is leasing an asset under a 10-year lease requiring annual end-of-year payments of $15,000. The lease can be capitalized merely by calculating the present value of the lease payments over the life of the lease. However, the rate at which the payments should be discounted is difficult to determine.9 If 10% were used, the present, or capitalized, value of the lease would be $92,175 ($15,000 6.145). (The value calculated by using a financial calculator is $92,169.) This value would be shown as an asset and corresponding liability on the firm’s balance sheet, which should result in an accurate reflection of the firm’s true financial position. Because the consequences of missing a financial lease payment are the same as those of missing an interest or principal payment on debt, a financial analyst must view the lease as a long-term financial commitment of the lessee. With FASB No. 13, the inclusion of each financial (capital) lease as an asset and corresponding liability (i.e., long-term debt...
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