Question

On January 1, 2021, Clear Water Airlines leased a jumbo jet from Unilever Corporation. The terms of the lease require Clear Water to make 20 annual payments of $1,000,000 on each January 1. Generally accepted accounting principles require this lease to be recorded as a liability for the present value of scheduled payments. Assume that a 5% interest rate properly reflects the time value of money in this situation. At what amount should Clear Water record the lease liability on January 1, 2021, before any payments are made, assuming that the first payment will be made on January 1, 2021?

Answer 1

It will be recorded at 13,085,320.86

Step-by-step explanation:

We will calculate the present value of an annuity-due of 20 years to know the lease liability

`C * (1-(1+r)^(-time) )/(rate) (1+r)= PV\\`

C 1,000,000

time 20 years

rate 0.05

`1000000 * (1-(1+0.05)^(-20) )/(0.05) (1+r)= PV\\`

PV $13,085,320.8597

It will be recorded at 13,085,320.86

at year-end interest will be recognize and icnrease the liability accouny

on january first will decrease the liaiblity by the 1,000,000 payment.