Federated Fabrications leased a tooling machine on January 1,2018, for a three-year period ending December 31, 2020. The leaseagreement specified annual payments of $36,000 beginning with thefirst payment at the beginning of the lease, and each December 31through 2019. The company had the option to purchase the machine onDecember 30, 2020, for $45,000 when its fair value was expected tobe $60,000, a sufficient difference that exercise seems reasonablycertain. The Machine's estimated useful life was six years with nosalvage value. Federated was aware that the lessor's implicit rateof return was 12%.
Question: When calculating the right-of-use asset/leaseliability for Federated, why do we use the present value of annuitydue and not the present value of ordinary annuity (since thepayments are made at the end of the year)?
Federated Fabrications leased a tooling machine on January 1,2018, for a three-year period ending December 31, 2020. The leaseagreement specified annual payments of $36,000 beginning with thefirst payment at the beginning of the lease, and each December 31through 2019. The company had the option to purchase the machine onDecember 30, 2020, for $45,000 when its fair value was expected tobe $60,000, a sufficient difference that exercise seems reasonablycertain. The Machine's estimated useful life was six years with nosalvage value. Federated was aware that the lessor's implicit rateof return was 12%.
Question: When calculating the right-of-use asset/leaseliability for Federated, why do we use the present value of annuitydue and not the present value of ordinary annuity (since thepayments are made at the end of the year)?
