Incremental Borrowing Rate is defined as

Incremental Borrowing Rate is defined as

• A. The rate implicit in the lease.
• B. The rate the lessee would incur to borrow funds to purchase the asset under terms different from the lease.
• C. The rate used to discount the minimum lease payments to their present value.
• D. The rate the lessee would incur to borrow funds to purchase the asset under like terms.

Answer: (D)

Incremental borrowing rate is the rate the lessee would incur to borrow funds to purchase the asset under like terms. This is the hypothetical borrowing cost for the lessee when the rate implicit in the lease isn’t readily determinable, taking into account the asset type, term, and the lessee’s credit risk. It’s used to discount the lease payments to their present value when the lease’s own implicit rate isn’t known. The other descriptions point to related ideas—the explicit lease rate if known, or a generic discount rate—but the defining idea of the incremental borrowing rate is that it’s the lessee’s own borrowing cost for a purchase under similar terms.

Incremental borrowing rate is the rate the lessee would incur to borrow funds to purchase the asset under like terms. This is the hypothetical borrowing cost for the lessee when the rate implicit in the lease isn’t readily determinable, taking into account the asset type, term, and the lessee’s credit risk. It’s used to discount the lease payments to their present value when the lease’s own implicit rate isn’t known. The other descriptions point to related ideas—the explicit lease rate if known, or a generic discount rate—but the defining idea of the incremental borrowing rate is that it’s the lessee’s own borrowing cost for a purchase under similar terms.