Question:
Explain how the time value of money concept is incorporated into the valuation of certain leases.
Answer:
Companies frequently acquire the use of assets by leasing rather than purchasing them. Leases usually
require the payment of fixed amounts at regular intervals over the life of the lease. Certain leases are
treated in a manner similar to an installment sale by the lessor and an installment purchase by the lessee.
In other words, the lessor records a receivable and the lessee records a liability for the several installment
payments. For the lessee, this requires that the leased asset and corresponding lease liability be valued at
the present value of the lease payments.
Explain how the time value of money concept is incorporated into the valuation of certain leases.
Answer:
Companies frequently acquire the use of assets by leasing rather than purchasing them. Leases usually
require the payment of fixed amounts at regular intervals over the life of the lease. Certain leases are
treated in a manner similar to an installment sale by the lessor and an installment purchase by the lessee.
In other words, the lessor records a receivable and the lessee records a liability for the several installment
payments. For the lessee, this requires that the leased asset and corresponding lease liability be valued at
the present value of the lease payments.
