Langlois
Services Inc. is using the contract-based approach to account for a lease of a
truck. The lease includes a residual value guarantee at the end of the term of
the lease of $16,000. Langlois estimates that the likelihood for the residual
value of $16,000 has a 50% certainty. Langlois feels that there is a 30% chance
that the residual value will be $12,000 and a 20% chance that it will be
$10,000. Calculate the probability weighted value of the residual guarantee
that needs to be included in the lease obligation recorded by Langlois when the
lease is signed.
For the contract-based approach, the probability-weighted
expected value of the residual guarantee must be used in the present value
calculation of the obligation.
Probability-weighted
expected value
$16,000 X 50% = $8,000
$12,000 X 30% = 3,600
$10,000 X 20% = 2,000 $13,600
