May 23, 2010, 11:37 AM
I was asked to calculate the implicit interest rate in a finance lease. The leasing arrangement (lease term is 5 years) comprises of lease payments being made semiannually (i.e. 1 July and 1 Jan – lease begins on 1 Jan and payments start on 1 July of that year and thereafter) and an unguaranteed residual, do I use an annuity rate for 10 periods to calculate the PV of the 10 lease payments and a discount rate for a single amount for 10 periods to calculate the PV of the unguaranteed residual? If so, will I use the same implicit interest rate to calculate the interest expense and principal reduction (lease liability) amount for the first payment on 1 July in the books of the lessee?